If you’re like most people, you’ve heard of a 1031 exchange – a method of swapping out one investment property for another – but what about a Delaware Statutory Trust, or DST? This guide explains DSTs in 1031 exchanges so you know about all your options.
What is a DST in a 1031 Exchange?
The acronym DST stands for Delaware Statutory Trust, and it’s an entity you may be able to use to defer capital gains tax from the sale of a rental property. Most DST programs are sponsored by large, big-name real estate companies, and they’re offered through securities brokers and dealers. A DST allows passive, fractional ownership in real estate – but it still qualifies as a “like kind” replacement property under IRS Code Section 1031.
Are There Benefits to Investing in a DST?
Many investors find benefits to investing in DSTs, including:
- Access to big properties with a low investment minimum. You may be able to invest in a larger property that you wouldn’t ordinarily be able to access on your own. That can include multifamily apartments, offices, hotels, and even retail and industrial properties.
- You can use a DST to diversify your investment portfolio because you can allocate the proceeds from selling one rental property to a variety of DSTs.
- Passive investing. DSTs have experienced property managers, and most are sponsored by big-name real estate companies. That means they handle property management and all the day-to-day operations of owning a rental – and you’re off the hook.
- Tax benefits. You’re entitled to the same tax advantages as you would be if you were investing in traditional real estate, including depreciation pass-through and interest deductions. You should consult a tax professional so you know exactly what types of tax advantages apply in your situation.
- Low minimum investment. You can invest with a low amount of capital, though typically, investing at least $100,000 allows you more flexibility in diversifying your exchange into several properties.
Are There Risks to Investing in a DST?
Though you’ll have to evaluate the risks on your own – and decide whether the potential is right for you – there are always risks involved with investing in real estate. You’ll face many of the same risks you’d face by investing in a single rental property if you invest in a DST. Some of the most common risks with investing in DSTs include:
- Failure to meet all the right requirements for a 1031 exchange
- No guarantee of growth or income
- Lack of control of management on the property or properties
Your REALTOR® can talk to you about other risks, as well as potential benefits, of investing in a DST as part of a 1031 exchange.
Related: How do you find good tenants?
Who Should Invest in a DST?
Anyone who wishes to can invest in a DST. However, this type of investment is extremely well-suited to people who want to:
- Earn passive income through real estate
- Invest in professionally managed, institutional-grade assets
- Diversify their portfolios
- Earn a steady cash flow
- Want to defer capital gains taxes through a 1031 exchange
- Need to beat the 45-day identification timeline for a 1031 exchange
Investors can often get into a DST with as little as $25,000.
Are You Buying or Selling a Duplex, Triplex or Fourplex in Silicon Valley?
If you’re selling a duplex, triplex or fourplex in Campbell, Cambrian Park, Los Gatos, San Jose, Santa Clara, Saratoga, Willow Glen or another community in Silicon Valley, we’re here to help. Call today or fill out the form below to find out about our innovative marketing plans that can put your investment property in front of all the right buyers.
If you’re also looking for a new multi-family property for sale or another type of home, check out our: