About Delaware Statutory Trusts

Introduction

A Delaware Statutory Trust (“DST”) is a business trust that can be used for real estate ownership where a trustee holds title to assets for the benefit of the trust interest owners. Each owner has a “beneficial interest” in the DST for federal income tax purposes and is treated as owning an undivided fractional interest in a property or several properties. As such, a DST meets the criteria to qualify for a §1031 Exchange. A trustee (typically an affiliate of the sponsor) manages, administers and operates the trust for the benefit of the investors pursuant to a Trust Agreement.

How Does It Work?

Because DST interests qualify for a 1031 exchange, investors may defer (and potentially eliminate) up to 100% of their capital gains and depreciation recapture taxes. In order to do this, investors must follow the rules regarding 1031 exchanges after the sale of investment real estate. Due to the fractional ownership structure of the DST, RCX works with clients to build their own portfolio of DST investments that meet each investor's goals and objectives (e.g. diversification by asset class, geography, sponsor etc.)

It is essential to seek professional guidance from tax advisors, legal experts, and real estate professionals, as the rules and regulations surrounding 1031 exchanges can be complex and subject to change.

The illustration above shows the timeline allowed

Advantages and Shortcomings

The DST structure provides both a level of protection and illiquidity (not uncommon in real estate) with the following characteristics:

DST Restrictions (“7 Deadly Sins”)

To ensure the beneficial interests of a DST are treated as qualified property for purposes of §1031, a DST may not have the power to do any of the following:

1. Accept contributions from either current or new investors after the offering is closed.

2. Renegotiate the terms of existing loans or borrow any new funds from a third party.

3. Sell real estate and use the proceeds to acquire new real estate.

4. Make other than minor repairs

   1. Normal repair and maintenance,

   2. Minor non-structural improvements, and

   3. Those required by law.

5. Invest cash held between the distribution dates other than in short-term government debt.

6. Retain cash, other than necessary reserves (all cash must be distributed on a current basis).

7. Enter into new leases or renegotiate the current lease.

While on the surface these seem very restrictive, these restrictions afford investors significant protection given that that the property or properties must be managed by the Trustee precisely as disclosed in the PPM.

RCX believes the sources relied upon herein are reliable, but takes no responsibility for its accuracy.