Utilizing a DST (Delaware Statutory Trust) in a 1031 Exchange

A DST (Delaware Statutory Trust), which provides fractional ownership in massive real estate projects can be a great investment option in a 1031 exchange, as:

• DST’s may provide steady monthly passive income

• They are management-free. (No more tenant hassles!)

• DST’s have no extra out of pocket expenses.

• They make the property identification process in a 1031 exchange a lot less stressful.

• An investor’s funds can be diversified across a few different DST offerings.  

Examples of some DST’s are multi-unit apartment buildings, medical offices, office buildings, student housing, or even storage facilities.  When an investor buys into a DST, the investor will own a percentage of the DST based on their capital contribution.  Most DST’s require a minimum investment of $100,000.   

Team Whitney’s blog on 1031 Exchanges discusses how an investor must reinvest all of the net proceeds from a 1031 exchange sale AND replace the debt on the relinquished property in order to avoid capital gains taxes. For example, if a Seller nets $1,300,000 from a sale of an investment property and also paid off $500,000 worth of financing during the sale, the Seller would need to find a replacement property for $1,800,000 or more, and normally that extra $500,000 would need to be additional cash brought in by the investor or a new note on the replacement property to replace the debt that was paid off, but wait, for DST’s, there is another option.  To avoid capital gains taxes utilizing a DST in a 1031 exchange:

1. A Seller can reinvest the exact amount of proceeds from the exchange into a DST offering, leaving no additional capital left to potentially be taxed on.  For example, a Seller can invest $1,632,456 into a DST.

2. A Seller can also receive a debt assignment from a DST offering, which will satisfy the debt requirement for the exchange. This is a GREAT tool whereby an investor does not have to bring in extra cash to avoid capital gains taxes, and the investor also does not have to apply again for traditional financing to replace the prior debt to avoid capital gains taxes.

Therefore, a DST investment can be perfectly sized to the exact amount of debt and equity an investor needs in a 1031 exchange, without the investor needing to bring in any additional capital.  

Team Whitney interviewed Jamie Furlong from Legacy Investment Real Estate for this blog.  According to Jamie, an investor must be an accredited investor in order to invest in a DST.  The definition of an accredited investor is:

1. An investor has a gross income of $200,000 or more if filing as a single person, or $300,000 or more if filing jointly, OR…

2. Instead of the income requirement, an investor can own a net worth of $1,000,000 or more in assets outside of the investor’s primary residence.  Therefore, a primary residence does not count, but investment properties, jewelry, cars, cryptocurrency, retirement accounts, bank accounts, etc. all can be included on the $1,000,000 net worth worksheet.

In Team Whitney’s interview, we asked Jamie Furlong a few other questions, which also led to the following important information on DST’s:

1. How long does an investor need to keep their investment in a DST?  Most DST’s will be an average of a 5–7-year investment/commitment.  An investor will be notified when a DST will be sold, and at that time an investor can decide to reinvest in another DST or to reinvest in traditional real estate to avoid capital gains taxes utilizing another 1031 exchange, or the investor can decide to cash out and pay capital gains taxes.  When a DST is sold, any proceeds are split amongst all of the DST investors as well.  

2. What is the average rate of return on a DST?  DST’s have an average of about a 4% return per year, but just like real estate, this return, or any return, is never 100% guaranteed. 

3. Can an investor invest in traditional real estate and a DST in the same exchange transaction?  If an investor is purchasing another piece of property in a 1031 exchange, but still has an extra $100,000-$200,000 leftover to spend, a DST exchange in addition to buying the property may be the perfect option to avoid capital gains taxes on the extra leftover “boot”.

4. What are some additional benefits of a DST?  DST’s can be great backup options in the identification period of a 1031 exchange, in case the first real estate property identified falls through for any reason.  DST’s also allow an investor to acquire ownership in institutional quality properties that would otherwise be out of reach.  

5. What if an investor has debt to replace from the relinquished property in the 1031 exchange in order to avoid capital gains taxes?  If a DST has financing against it, the investor does not have to provide tax returns or financials to the lender.  The loan will not appear on the investor’s credit report.

Danielle Whitney Moore from Team Whitney Real Estate interviewed Jamie Furlong from Legacy Investment Real Estate for the information in this blog, as their company specializes in DST investments.  Jamie can be reached at (323) 229-2885 or at Jamie@LegacyIRE.com.  For more information or to set up a personal consultation, please contact Danielle Whitney Moore with Team Whitney (Keller Williams Realty L.A. Harbor) at (310) 987-9103.

Registered Representative and securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Legacy Investment Real Estate, LLC is independent of CIS and Keller Williams Realty L.A. Harbor.