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Understanding DST investments Inside-Out

by Rishav

A good investment is one that offers excellent returns and stability at the same time. You should keep hunting for unique investment options and must possess the ability to sustain in any financial circumstances. Planning a stable financial investment certainly doesn’t require a wizard’s skills, but it isn’t that easy either. After all, how can one forget? ‘Investments are subject to market risks.’ To minimize such risks, a pro real estate investor must look for investments that ensure return and stability. In real estate investment, a Delaware Statutory Trust (DST) offers the same benefits to its investors.     

So, what is a Delaware Statutory Trust?

A ‘Delaware Statutory Trust’ is a business trust that owns income-producing real estate. DSTs were established in accordance with the Delaware Statutory Trust Act, 1988. A Delaware Statutory Trust owns, manages, controls, and administers high-performing investment properties. If you’re doing a 1031 exchange, you can invest your proceeds in a DST property and defer up to 100% capital gains tax. DSTs allow small to medium-sized investors to own big real estate along with other investors. You can find DST properties throughout the country. Industry professionals are responsible for managing DST properties. 

The interest of every investor in a DST is protected under common law. As DSTs have large structures, you can own an expensive real estate for a little amount along with other investors. You can directly buy DST shares or invest your 1031 proceeds in a DST property. As a DST investor, you will receive a fixed share of income, tax benefits, and appreciations. Individual investments surely guarantee bigger returns. However, the risk of owning a big property all alone is also massive. On the other hand, with a DST investment, you can enjoy a steady flow of income by making a small investment. Therefore, it can be said that DSTs are far more beneficial than individual real estate investments where investors have to bear bigger risks. DSTs don’t have strict guidelines, which makes a DST investment quite flexible for investors. 

Key elements of a DST agreement:

  1. There is no limit on the number of investors, which means you can expect a DST to have more than a hundred investors. TIC, which is almost similar to DSTs, can have only 35 investors.
  2. As every DST investor owns a fixed interest in an income-producing asset, you may not receive the property title.
  3. As a DST investor, you cannot form single-member LLC. Some investors may find it a bit unfavorable situation. However, it’s important as forming single-member LLCs can jeopardize other investors’ interests in the trust.    
  4. DST properties are regulated and managed by the ‘trustees,’ who are also responsible for resolving any dispute within the trust. You may not have a voting right in a DST.  

These are a few limitations that you may encounter with a DST investment. However, in comparison to the benefits, these drawbacks are too insignificant.  

As a DST investor, you receive the following benefits – 

  • You get the opportunity to reinvest your 1031 proceeds in a DST asset and defer capital gains tax.
  • Due to its large structure, you get to own big commercial properties for a little investment, which you may not be able to own individually. 
  • It’s a great opportunity to expand your investment and diversify your portfolio. You can split your proceeds and invest in multiple DST assets at the same time without any restrictions.
  • As a DST investor, you don’t need to look after your property. DST properties are managed by industry professionals. 

You cannot ignore these benefits as there are barely any investment offers available in the market. DSTs are private trusts, which means they are managed by a group of people called sponsors or trustees. 

Rules for forming a DST – 

 Let’s see the rules for forming a Delaware Statutory Trust.

  • All involved parties must develop a private trust agreement under which the interest of every member is secured. 
  • A Certificate of Trust must be obtained from the Delaware Division of Corporations after completion of the agreement.
  • There is no restriction on the location, which means you don’t need to be a resident of the state of Delaware to be able to invest in a DST. However, the trust must have a registered agent and office in the Delaware State if it converts into a registered investment company.
  • In the opposite situation (when the trust doesn’t convert into a registered company), at least one of its trustees must be a resident of the State of Delaware or has their principal business located there.

As you can see, there is barely anything a DST requires that an investor can’t fulfill. DSTs investments are a stress-free investment in which you are not required to deal with any issues related to the property you purchase. Being the master tenant, the real estate sponsor firm is solely responsible for looking after every property. The firm acquires properties under DST and then open up the trust for potential investors to buy their share of interests in the property. 

The two ways of investing in a DST – you can directly buy DST shares or use your 1031 proceeds to purchase a DST property.

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