No doubt many real estate investors have heard of the 1031 exchange derived from the 1921 approved Section 1031 of the Internal Revenue Code.  After all, for more than 100 years, investors have been able to defer taxes on capital gains and depreciation recapture at the time a real property investment is sold if the net equity from the sale is reinvested into a similar property of the same or greater value within a specified time frame. This term “like-kind” real estate can be broadly defined to include most types of investment real estate assets, such as multifamily apartment communities, self-storage, multi-tenant retail buildings, and essential net lease distribution facilities. 

Still, while many real estate investors know about 1031 exchanges, they are not as familiar with one of the premier compliments to the 1031 exchange – the Delaware Statutory Trust. 

A Historical Look at the Delaware Statutory Trust

As early as the 16th century, the concept of property being held in trust by one person for the benefit of another was an integral part of the English Common Law. Lawyers have used the idea of the “common law” trust for centuries to help wealthy people pass ownership of assets from one generation to another with the least taxation and a significant amount of security. However, common law trusts are often outdated and can create several legal disputes within the trust. So, in 1988, the State of Delaware wanted to create a new statutory trust entity designed to improve the functionality of trusts in structured financial transactions. While several states had adopted statutes recognizing trusts for business purposes, the Delaware Business Trust Act of 1988 was the first to completely rewrite outdated common law trust principles and introduce new provisions that greatly expanded how investors could use a trust entity in modern structured financial transactions. In 2002, the State of Delaware officially changed the name to the Delaware Statutory Trust Act, and two years later, the Internal Revenue Service’s Revenue Ruling 2004-86 was passed, allowing DSTs to be used as like-kind real estate for 1031 exchange replacement property purposes.

To understand how popular Delaware Statutory Trust properties are for 1031 exchanges, consider that an estimated more than $5 billion in equity will be invested into DSTs in 2024, a 9% increase from a year ago. 

But just what is it about the DST investment structure that appeals to investors? For many professional and retail real estate investors, DSTs offer at least four appealing advantages for 1031 exchange investors, including the following.  

Benefit Number One: 

Tax Advantages of the Delaware Statutory Trust

First and foremost, DSTs allow investors to defer a whole bunch of taxes triggered after an investment piece of real estate is sold following significant appreciation gained over years or even decades. This single aspect can appeal to many investors, especially those who have owned rentals or commercial properties for years and want to sell but can’t find a suitable property to exchange into and can’t stomach the tax bill they would face. Delaware Statutory Trust properties can be the perfect tax-efficient 1031 exchange solution. As stated earlier, DSTs are eligible for 1031 exchanges and, therefore, for deferring federal gains capital tax, state capital gains tax, depreciation recapture tax, and the Medicare surtax. In many cases, these taxes can significantly reduce the proceeds from the sale of an investment property.

Benefit Number Two: 

DST 1031 properties Passive Real Estate Investments 

One attractive aspect of DST 1031 exchange investments to many investors is that they eliminate the challenges associated with active ownership and management. This can appeal to investors near or at retirement who are tired of the hassles that real estate ownership and active management often bring. They are tired of tenants, toilets, and trash and want to avoid actively managing their real estate. 

In DST investments, a DST sponsor creates the DST and is responsible for managing the entire business and assets of the trust. These responsibilities can include the following:

• Underwriting the real estate 
• Conducting all the research and review on the property(s)
• Arranging the necessary financing – although some DST 1031 investments are debt-free with no loans on them
• Creating a business plan for the property(s)
• Finding a property management team.
• Coordinating investor relations and potential monthly distribution checks to investors.

In this way, the Delaware Statutory Trust syndication provides investors a passive ownership structure, allowing them to enjoy retirement, grandkids, travel, and leisure.

According to Dwight Kay, Founder and CEO of Kay Properties, investors in DSTs also receive the potential for monthly distributions. 

“Investors can potentially receive monthly income and the pro-rata portion of any potential principal pay-down from the loan on the property, thereby potentially building equity. In addition, DST 1031 properties are structured so that the investors in the DST may receive their pro-rata portion of the potential net rental income generated by the property’s tenants,” said Kay. 

Benefit Number Three:

 Access to Larger, Institutional Grade Assets

Another attractive element for investors of Delaware Statutory Trust properties for 1031 exchanges is that they provide investors within the trust the opportunity to access large, institutional-grade real estate assets that would otherwise potentially be outside of an individual investor’s price point. With a typical investment minimum investment of $100,000, individual investors in a DST can purchase an ownership interest in large industrial distribution centers, multifamily apartment communities, and even multi-tenant retail properties. In this way, the beneficial fractional interest structure of Delaware Statutory Trust 1031 exchanges allows investors to access a level of real estate that they oftentimes would not have been able to buy before.

Benefit Number Four: 

The Potential to Reduce Risk Through Greater Diversification*

Another advantage of the Delaware Statutory Trust structure for 1031 exchange investors is that it may increase the ability of investors to invest in multiple properties, thus potentially reducing individual risk. Beyond allowing investors to participate in multiple investment properties, DST syndications also allow investors to invest in multiple asset classes (multi-family, commercial buildings, self-storage, medical facilities, industrial distribution centers, etc.) and multiple geographic locations. 

Portfolio optimization and diversification was first recognized by Nobel-Prize-winning economist Harry Markowitz and continues to be one of the reputable economic theories for success today, including its application in Delaware Statutory Trust 1031 exchanges. * It is important to note, however, that diversification does not guarantee profits or protection against losses and that investors should read each DST offerings Private Placement Memorandum (PPM), paying attention to the risk factors before considering a DST investment.

Obviously, as with all forms of real estate investments, investors should be aware of an underlying level of risk, including things like economic downturns, vacancies, tenant bankruptcies, etc.  Investors should not invest in DST investments or real estate syndications if they cannot sustain the loss of their invested principal.

About Kay Properties and www.kpi1031.com: 

Kay Properties helps investors choose 1031 exchange investments that help them focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s – Tenants, Toilets and Trash!). We have helped 1031 exchange investors for nearly two decades exchange into over 9,100 – 1031 exchange investments. Please visit www.kpi1031.com to access our team’s experience, educational library, and full 1031 exchange investment menu.

This material is not tax or legal advice. Please consult your CPA/attorney for guidance. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee returns and does not protect against loss. Potential cash flow, potential returns, and potential appreciation are not guaranteed. There is a risk of loss of the entire investment principal. Please read the Private Placement Memorandum (PPM) for the offerings business plan and risk factors before investing. Securities offered through FNEX Capital LLC member FINRA, SIPC.

Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.

Published by Liana P.