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WHY YOU NEED TO KNOW ABOUT DELAWARE STATUTORY TRUSTS (DST’S)
I recently attended a presentation where the subject was Delaware Statutory Trusts as a tool for 1031 Tax Deferred Exchanges. It behooves brokers and investors to know about this option when advising about or implementing a 1031 Exchange. It can literally save a person thousands of dollars having this knowledge.
A DST is a strong option for clients who want to complete a 1031 Exchange but prefer a passive hands-off investment. This is especially useful for clients who are tired of active management or need a reliable backup to avoid a failed exchange.
What happens in the real world is we have a client who sells a property and needs to do a 1031 to avoid/defer the taxes. That client has difficulty identifying a suitable replacement property within the 45 day period allowed after closing on a relinquished property. Panic sets in the closer he gets to the 45 day deadline. In many cases, there are no good choices that he would want to own.
There are several firms that specialize in selling what amount to fractional and undivided interest in a larger property. Examples are large office, industrial or apartment complexes, student housing, hotels, and self storage facilities. These are professionally managed so the investor doesn’t have to lift a finger or worry about tenant calls in the middle of the night.
They are set up with a plan in mind to run for a certain number of years before they are sold, at which time the proceeds are distributed to the investors. During the holding years, the investment kicks off a return on your invested proceeds. The interest rate varies but it is always better than putting the money in the bank. Your invested proceeds are returned with any appreciation when the property is sold OR you have the option to reinvest in another DST property.
The downsides of a DST are: 1) you have no control over the investment, 2) this investment is not liquid…you can’t get your money out of it if you decide you need the cash, 3) there is risk of investing with the wrong people and potentially losing your money. So, it’s not for everybody. The downsides for us brokers is that we don’t make any commission on this. The upside is we can save our clients a lot of money by offering a DST as an option on a 1031 exchange.
For an information package on DST’s, give us a call or Google Delaware Statutory Trust.
By Bruce Kaplan, Senior Broker at Premier Commercial Realty, BruceK@PremierCommercialRealty.com
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