The Strength of a DST Solution
Updated: Apr 22, 2021
In the eyes of the IRS, a beneficial interest in a DST is considered a direct interest in real estate. The owner of that interest has the right to receive distributions from rental income or the sale of the property. At the same time the owner of that beneficial interest is not required to, and in most cases, does not have the responsibilities of managing the day to day operation of the property. They are not required to manage the property to enjoy the full benefits of property ownership. The owner-investor has a purely passive relationship to the Trust’s properties.
The title of the property is held by the Trust and not by the individual investors hence there is no liability to the individual on anything related to the property. This includes any judgements or liens (typically quite rare in occurrence) or any financing placed on the property (quite common). Any loan on the property is considered non-recourse to the owner/investor. This is in contrast to TIC (Tenant-In-Common) structures which were most popular in the 1990s and in the early 2000s. With TIC’s individual investors were liable – the financing was “recourse”. The non-recourse nature of the DST financing is one of a number of reasons why DSTs continue to gain in popularity with investors.
Because the DST is classified as a non-taxable entity, all profits (and losses) and accompanying tax liabilities are passed through to the investor. Nothing is guaranteed – but as a rule most DSTs will show a profit with some of that profit offset by allowable deductions.
Each DST is poised to place a large of amount of investor capital into acquiring the right property or portfolio of properties. They tend to operate at price point levels that few investors can. And for this reason, DSTs often times offer investors a chance to place equity into the kind of large-scale, high quality portfolios that are typically available only to institutional investors. DSTs can, and often do, compete with institutional investors in acquiring real estate, which represents another factor in risk mitigation. Most institutions are highly risk averse when they invest in anything, with real estate no exception.
In terms of financing the property, primarily financing as part of the acquisition process, the Sponsors of the DST will arrange it on behalf of the DST. Investors are not involved in the financing process and therefore have no responsibility or duties in that regard. The signatory trustee of the DST remains in that capacity for the duration of the DST ensuring continuity of management and oversight of DST activities, property ownership and management.
Mark Kosanke, former PricewaterhouseCooper Senior Corporate Auditor/CPA, 14 years ADISA board member and former president writes the following, which underscores how the DST guidelines protect the investors with the limits imposed on the Trustee.
*** DST investments are illiquid, highly speculative and like all real estate, may involve substantial risks. DST owners do not maintain control over management decisions and are subject to additional IRS regulations. Potential tax benefits must be weighed against the costs and fees associated with a DST investment and its management.
By Don Meredith, President of Tactical Income Inc.
Author of The DST Revolution –1031 Exchange into retirement mode. 2nd Edition
Contact Don Meredith of Tactical Income, to learn more about Delaware Statutory Trusts (DSTs) and 1031 Exchanges at: firstname.lastname@example.org or (619) 726-6100.
Securities through LightPath Capital, Inc., Member FINRA/SiPC, 1560 E. Southlake Blvd., Suite 100 Southlake, TX 76092 925-899-1709 Direct 214-734-2957 Office