What is a DST?
A DST is short for Delaware Statutory Trust. DSTs are pooled investment vehicles that purchase investment properties to help investors qualify for 1031 Exchanges. This helps qualify the 1031 Exchange because there is an identified physical property for investment proceeds to be moved into.
Upon conducting a 1031 Exchange into a DST, the investor will receive fractional shares of the investment.
- What is a 1031 Exchange?
- You can 1031 Exchange into a Delaware Statutory Trust (DST)
- Benefits of Exchanging a 1031 into a DST
- What is a REIT?
- How Does a REIT Qualify for 1031 Exchanges?
- Process of Moving a 1031 Exchange into a REIT
- Benefits of 1031 Exchanges to REIT
- REIT vs DST
- IntelliVest Wealth Management Can Help You With These Exchanges.
Examples of a DST (Delaware Statutory Trust)
DSTs are typically much larger real estate projects like the ones below:
- Healthcare Facilities
- Large Multifamily Complexes
- Distribution Warehouses
- Grocery and Retail
One of the many benefits of a DST is the ability to diversify your real estate portfolio into these properties. Rather than having a portfolio of Single Family Rentals you can have a mix of Single Family, Multifamily, and Commercial.
Click here for 10 reasons to consider a DST.
What is a 1031 Exchange?
1031 Exchanges can be great tools for building wealth if used properly. However, one of the many issues investors run into is not being able to find a property to move the money into. These can be because the investor does not like the local investments available or they are having difficulty using up all of the proceeds to fulfill the 1031 Exchange qualification.
Property owners can pay as much as 42% in taxes on the sale of their property. 1031 Exchanges can help deffer or reduce those taxes.
A 1031 Exchange is the process of selling an investment property and using the proceeds to purchase another like-like real property.
Click here to read 10 Powerful Reasons for a 1031 Exchange.
You can 1031 Exchange into a Delaware Statutory Trust (DST)
A Delaware Statutory Trust (DST) is an investment vehicle that allows investors to 1031 Exchange into. Exchanging into a DST has become a popular choice among real estate investors. This is because investors can have fractional shares of high quality institutional level real estate. DSTs can be a part of a well diversified portfolio even for active real estate investors.
Delaware Statutory Trusts identify properties that they believe are good investments to qualify the 1031 Exchange for its’ investors.
Please be aware that in order to exchange into a DST, you must be an Accredited Investor.
*Accredited Investors are defined by the SEC as an individual with a net worth (excluding primary residence) or $1,000,000+ or annual income in excess of $200,000 for last two years for an individual or $300,000 for a couple filing jointly.
Benefits of Exchanging a 1031 into a DST
There are plenty of benefits to Exchanging into a DST:
- DSTs will usually purchase institutional level properties. This can help diversify a portfolio into properties such as health care facilities, larger multi family complexes, industrial building, and much more.
- This can also be seen as a form of passive income. DSTs can provide an income stream to their shareholders on either a quarterly or monthly basis.
- For investors who are concerned about paying large amounts in taxes, this can be used as an estate planning tool. Your inheritors will receive a Step Up Basis on the funds inside of the DST.
- You can use this exchange in conjunction with other qualifying properties you may want to invest into.
What is a REIT?
A REIT is short for a Real Estate Investment Trust. REITs are pooled investment structures designed to invest in Real Estate Investment Properties. The goal of REITs is to provide a passive way for investors to invest in the real estate market.
Generally investors receive dividend income from the rental income the properties generate.
There are plenty of REITs out there both on the public and private side. Public REITS can be purchased on the stock market, while private REITS tend to not be as accessible.
How Does a REIT Qualify for 1031 Exchanges?
Is it possible to move your 1031 Exchange into a REIT? Yes, it is! However, the process may not be as direct as you may think.
In order to qualify for a 1031 Exchange, an investor must identify another investment or like kind property to move the proceeds into. REITs own a diversified portfolio of many properties and because of this you have to use a loophole. You must move proceeds into a DST before the assets can be moved into a REIT.
This is how investors can move their investment properties into a REIT.
Why were DSTs Created?
Most DSTs work with larger REITs on properties the REIT wants to buy. Typically the REIT will later purchase the properties inside of the DST for their own portfolio. Those who did own a piece of the DST will now have shares of that REIT. This is how your 1031 Exchange Proceeds can be moved into a REIT.
Most of the time, DSTs are created for the sole purpose to be purchased by a REIT. Most REITs know investors want to move a portion of their proceeds to them, so they created this structure to help make it happen.
This Process is also Known as an “UPREIT” or even a 721 Conversion into a REIT.
What is an UPREIT?
An UPREIT, also known as an Umbrella Partnership Real Estate Investment Trust, is the process of moving your share/ownership of a real estate investment property into a REIT.
Process of Moving a 1031 Exchange into a REIT
- Investment Property is Sold and Proceeds are moved to your desired QI (Qualified Intermediary).
- IntelliVest Wealth Management will work with the client to identified the DST the Client is comfortable moving their proceeds into.
- QI wires funds to the proper DST.
- DST is purchased by a REIT.
- Investor will receive fractional shares of the REIT.
Benefits of 1031 Exchanges to REIT
- Many of these REITs are invested in many properties across the world. Once you are inside of the REIT you are able to be a part of a diversified real estate portfolio.
- Once proceeds are inside of the REIT, you are able to take advantage of some of the tax benefits of the REIT structure.
- REITs can be a source of passive income for investors.
- Just like DSTs, REITs can be a useful as a estate planning tool as inheritors will receive a step up basis on the shares you hold inside of the REIT.
REIT vs DST
The decision to invest in a REIT vs a DST really boils down to your personal goals and investment style. Both can be seen as a passive approach to real estate investing.
DSTs are Concentrated Portfolios
DSTs typically are only investing in one or a few properties. This means that you will not be as diversified as you would inside of a REIT that invests in many properties. This can be both a positive and a negative feature. Because a DST has a more concentrated portfolio investors can find DSTs that cover a specific real estate sector they are looking to invest into.
As an example, an investor may find that a large percentage of their portfolio is focused on Multifamily Housing and they want to diversify into distribution warehouses. Assuming the investor qualifies, they can find a DST that is invested in a distribution warehouses.
In addition, DSTs can be useful for 1031 exchanges to assist with deferring capital gains.
REITs are Updating Their Real Estate Holdings
As mentioned, the over concentration of DSTs can be a positive or a negative. For unsophisticated investors, understanding the differences of real estate properties and when to be investing in them may be more work than what the investor is looking for. REITs may be a better option as they are more diversified and have portfolio managers that buy and sell properties inside of the REIT on your behalf.
Risks of a DST:
If you are interested in moving your proceeds from a 1031 into a DST, or any of the investment structures mentioned in this article, please be aware of some of the risks:
- You are subject to investment risk. As with any investment, there is always the risk of your investment going down in value.
- Both DSTs and REITs are generally considered to no be liquid investment strategies. This means that the month invested into them is not as easily accessible as public stocks that could be sold on a day to day basis. This should be considered when deciding whether these strategies are right for you.
- Once you 1031 Exchange into a REIT you will no longer be able to conduct a 1031 again.
IntelliVest Wealth Management Can Help You With These Exchanges.
IntelliVest Wealth Management works with some of the largest investment management companies to help clients 1031 Exchange into a DST.
We offer free consultations to assess if this investment structure is appropriate for you and your goals. From there we can look at the appropriate investment companies to work with.
If you have questions if your property qualifies for these programs please contact us or call at (864) 598-0000.
Fee Simple Property
A Fee Simple Property covers a broader range of investment real estate. This typically will cover any property owned outright by the investor. An exchange into a fee simple property is usually best for investors who enjoy complete control over their investments. However, with more control comes more responsibility.
Unless if a property management company is hired, investors will have to endure all the work involved with running the property. This can include:
- Finding Tenants
- Removing Tenants
- Collecting Rent
- Any legal disputes you may have with Tenants
Unlike a DST, you can usually continue to 1031 Exchange from one Fee Simple Property to the next.
*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.