10 Reasons to Consider a DST
Intellivest Wealth Management can assist in helping investors find replacement properties typically through a DST, also known as a Delaware statutory trust. Real estate agents regularly work with clients to execute 1031 exchanges. Here are 10 reasons for agents and investors to consider DSTs.
1. Avoid Financing Obstacles With a DST
In a 1031 exchange transaction, the debt placed or assumed on the replacement property (or the debt on the replacement property plus additional cash used) must be equal to or greater than the debt relieved in the relinquished property. Agents may run into a road block when their clients try to get financing on their replacement properties.
Properties with Debt Moving into a DST
For example, an agent may be working with a client to sell an apartment building worth $5 million with $2.5 million in debt, or 50% loan-to-value (LTV). If that property owner cannot get approved for a $2.5 million loan on their replacement property, then most likely the owner will not sell and the broker will not receive a commission.
A DST can help solve this problem. The DST is a pass-through entity that owns real estate assets. When a replacement property is owned by a DST, the DST will be the borrower of any loan and individual investors in that DST will not need to be individually qualified with a lender.
2. DSTs Can Make Back Up Properties
A common strategy to identify replacement properties is the “3 Property Rule,” where an exchanger may identify up to three properties, without regard to their fair market value, within 45 days. Identifying only one property may be dangerous because a property can fall out of escrow for many reasons such as financing or inspections.
To secure an opportunity to execute a successful 1031 exchange, the exchanger could identify the first property as defined by the investor/commercial real estate agent. The exchanger can then identify two additional properties owned by DSTs.
3 Property Rule Example with a DST
Property #1: Property identified by investor/broker
Property #2: Property owned by DST
Property #3: Property owned by DST
3. Avoid Taxable Gains on Boot
The exact dollar amount of the replacement property is a common challenge in 1031 transactions. In one example, the relinquished property sells for $2.0 million and the exchanger identifies a replacement property for $1.8 million. The difference in the price of the relinquished property and the price of the replacement property results in a taxable amount on the remaining $200,000. Under the “3 Property Rule,” DSTs provide a solution.
Sale Price of Relinquished Property Example: $2.0 million
Replacement Property #1: $1.8 million property identified by investor/broker
Replacement Property #2: $100,000 investment in property owned by DST
Replacement Property #3: $100,000 investment in property owned by DST
Result: All $2.0 million is exchanged with no taxable income.
4. No Property Management Headaches
The property of a DST is professionally managed by a third party. Professional managers handle the Terrible T’s: Tenants, Toilets, Trash, Turmoil, Termites.
The investor enjoys the Terrific T’s: Travel, Time, Tennis. DST programs can also offer additional benefits, including the direct deposit of distributions, and reporting through Substitute 1098/1099s.
5. DST Diversification Benefits
Investing in a DST can provide portfolio diversification.
For instance, an investment could be made in a single DST that owns multiple properties in several states. It would be almost impossible for a broker to identify three replacement properties in three different states within the allowed 45-day time frame. As a result, DSTs are a way to achieve diversification.
6. Don’t Get Sidelined
Many realtors have clients that will not sell until they find the “right” property. Having the option to invest in institutional-grade properties owned by professionally managed DSTs may get investors off the sidelines, and the realtor receives their commission.
7. Swap Till You Drop
A DST is different than a 721 Exchange (UPREIT) transaction where the investor’s exchange journey ends with the sale of the UPREIT. The DST structure allows the investor to continue to exchange properties over and over again until the investor’s death.
Upon the death of the investor, under current tax laws, the heirs would get a “step up” in basis, thereby avoiding capital gains taxes on the original and subsequent properties.
8. Estate Planning With a DST
Everyone wants the best possible scenario for their heirs before they pass. Investing in a DST can eliminate the opportunity for children or heirs to argue over what to do with an investment property when the owner passes away.
The heirs continue to receive distributions from the investment, and upon the sale of the property by the DST, each of the heirs can choose what to do with their inherited portion. One heir can continue to exchange the investment, while another can sell and receive cash proceeds.
9. Quality Properties and Leverage Options
IntelliVest Wealth Management can help build a diversified portfolio of properties across the United States, and a wide variety of property types and leverage options. This wide range of opportunities enables investors to select a high-quality, institutional-grade private placement program that best suits their needs.
10. A DST can Have Low Minimums
Typically an investor can exchange as little as $100,000 into a DST. However, each DST program is different and may have different minimums. This can include the remaining assets leftover from a property exchange.
Disclosures
*IntelliVest Wealth Management is a Registered Investment Advisor Headquartered in South Carolina. This is not financial advice and is for educational purposes only. Please consult a financial professional to discuss your personal financial goals.
Risks
Some of the risks related to investing in commercial real estate include, but are not limited to:
Market risks such as local property supply and demand conditions.
Tenants’ inability to pay rent
Tenant turnover
Inflation and other increases in operating costs
Adverse changes in laws and regulations
Relative illiquidity of real estate investments
Changing market demographics
Acts of God such as earthquakes, floods or other uninsured losses.
Interest rate fluctuations and availability of financing.
Because each prospective investor’s tax implications are different, all prospective investors should consult with their tax advisors
Not an offer to sell or solicit.
The information contained herein is neither an offer to sell, nor the solicitation of an offer to buy any security in any program which can be made only by the investment-specific Private Placement Memorandum, and sold only by broker dealers and registered investment advisors authorized to do so.
