Passive Real Estate Investing

What is a DST?

Delaware Statutory Trusts (DSTs) allow owners of real estate to sell their investment real estate and potentially defer capital gains taxes. DSTs are derived from Delaware Statutory law as a separate legal entity and formed as private governing agreements for the purposes of managing, administering, investing, and/or operating real, tangible, and intangible property; or business or professional activities for profit that are carried on by one or more individuals who act as trustees for the benefit of a party who is entitled to a beneficial interest in the trust property.

Though Delaware Statutory Trusts are not new, in 2004 the IRS came out with an official Revenue Ruling detailing how a DST could be structured in such a way that it would qualify as a property replacement vehicle for 1031 Exchanges. Well known to real estate investors, a 1031 like-kind exchange allows you to defer the capital gains tax on the sale of investment property by reinvesting the proceeds into a similar qualifying property.

As a result DSTs have become an investment vehicle for investors who want the benefits of owning real estate without becoming a “landlord”, as well as current real estate investors who no longer want the responsibilities of being a landlord.

How do DSTs work?

A property is identified and acquired under a DST by a sponsoring real estate investment firm. The same firm, also acting in the capacity as the master tenant, opens up the trust for potential investors to purchase a beneficial interest. In this realm an accredited investor would have an opportunity to own a beneficial interest in a property that would normally be out of reach to them from an investment standpoint. Additionally, they would also benefit from a professionally managed property without any of the associated landlord responsibilities.

What are the benefits of a DST?

  • Receive passive income from real estate minus the work
  • Own shares of major commercial real estate properties that currently produce income
  • Cash out the equity on your highly appreciated property into an income producing property AND potentially defer your capital gains with a 1031 exchange
  • Get the benefits of real estate ownership and income without the stress and hassles of property management
  • Create an easily dividable asset for your heirs

Do you own highly appreciated investment property?

  • Many people who own highly appreciated investment property feel trapped from cashing out due to the high tax bills they face on their gains. A DST qualifies as a 1031 like-kind exchange. That means you may be able to defer your tax bill AND still be invested in an income producing property without any property management responsibilities.

Are you interested in investing in income producing properties?

  • If suitable in light of your other holdings and risk tolerance, a DST can be a great addition to your portfolio whether you are a seasoned real estate investor or new to investing in real estate. The sponsoring firms make it easy to choose from a portfolio of properties to find one that best suits your investment strategy. There are also opportunities to invest in properties that are currently producing income.

Are you a current landlord tired of the responsibilities and dealing with the Terrible Ts?

  • A DST can be a great way to enjoy the benefits of real estate ownership without dealing with the Terrible Ts of being a landlord: Tenants, Trash, and Toilets. As an investor in a DST, you are not responsible for the property management. In fact, many of the properties have professional property management companies already in place so you no longer need to be involved in the upkeep and maintenance.

Are you looking for an easily divisible asset to leave your heirs?

  • Owning property can be a wonderful investment but challenging to split up amongst loved ones. A DST is a real estate investment where you buy a fractional ownership interest that can be easily divided amongst your heirs avoiding potential family squabbles.

Did you just sell your highly appreciated investment property and can’t find a like-kind replacement?

  • A DST qualifies as a like-kind 1031 exchange, so if you have sold your property and are almost out of time to find a suitable replacement, you can invest in a DST and defer your taxes on the gains. When it comes to investing in real estate, finding the right property is crucial. Don’t rush into it just because you may be running out of time. Invest in an income producing property that qualifies as a 1031 like-kind exchange.

What would be a reason not to do a DST?

  • Liquidity – You are not in control of the decision as to when the assets will be sold. If you need liquidity in less than 10 years from your real estate investments, The DST may not be a good alternative for you. Many investors however wish to keep their 1031 exchanges going until there is eventually a step up in basis. Also, you may not be ready to retire from building your real estate empire. For instance, if you are younger and a successful real estate developer, you may have a much higher potential investment return continuing your building of real estate equity as an active investor rather than as a passive investor using the DST.

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About Madrona Financial Services

Madrona Financial Services is a full-service financial advisory and the informed investor’s choice for DSTs. Our team of financial advisors and CPAs analyze potential DST offerings against a disciplined set of investment criteria. And as fiduciaries, we are always legally obligated to act in your best interest. That means you can be confident in knowing that the DST opportunity has been thoroughly vetted and selected to meet your specific investment goals.

Madrona Financial Services is also held to a fiduciary standard meaning you’ll typically pay lower fees on your DST transaction than you would with a traditional Broker-Dealer, because we don’t earn transaction-based compensation. Having lower fees benefits you by having more of your initial investment go towards your DST ownership percentage. And owning more of your DST translates into larger monthly income checks.

Remember, deciding where to buy your DST is as important as selecting the right DST for you. At Madrona Financial Services you can be confident in knowing:

  • As CPAs, we thoroughly vet the DST opportunities
  • As fiduciaries we are legally obligated to always act in your best interest
  • We are an independent investment advisor and are often able to make these products available at lower cost than a traditional Broker-Dealer
  • With lower fees, more of your money goes towards your investment, which, all other things being equal, can mean larger monthly income checks
  • We are experienced in DSTs and wealth management
  • We look at your overall investment portfolio to help you make tax-smart investment decisions
  • You get the Madrona Bundle of Services. The includes:

A Note From Brian Evans

“Whether you need help in designing a comprehensive retirement strategy or want to learn how to integrate real estate into your investment portfolio with a DST, we have the experience and the resources to help you every step of the way. By taking advantage of our integrated financial solutions, which include investment management, tax strategies, retirement planning, legacy planning, and DST investments, we remove the stress of coordinating between several different firms. We strategically manage every aspect of your finances all under one roof so you can be confident in knowing that nothing will fall through the cracks. We pride ourselves on an unparalleled level of client service and appreciate the opportunity to help make your financial ambitions a reality. If you are ready for a new approach to investment management and retirement planning we invite you to experience the Madrona Financial Services difference.”

Meet Dawn Campbell, Your DST Specialist

Dawn Campbell has been an executive in the financial services industry for over 25 years. She was the 1031 Exchange Director at AEI Capital where she pioneered one of the first securitized 1031 exchange products in the United States. She was also Vice President of Private Capital for Inland Securities where she educated and advised financial professionals and their clients on 1031 exchange tax deferral strategies. She is a national expert on all aspects of IRC section 1031 and DST investment products. She was a founding member of TICA (now known as ADISA) and has raised over $500mm in capital for securitized 1031 exchange products.

Dawn has also guided investors in various wealth management strategies as a financial advisor for Bernstein Global Wealth and Merrill Lynch. She was honored by Finance and Commerce Magazine as a top woman in finance and named woman change maker by Minneapolis/St. Paul Magazine.

Dawn holds a bachelor’s degree from the University of Minnesota where she graduated cum laude with a double major in journalism and economics.

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Disclosure:

*To be an accredited investor, an individual must have had earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years and “reasonably expects the same for the current year,” according to the SEC.

Or, the individual must have a net worth of more than $1 million, either alone or together with a spouse. With the passage of the Dodd-Frank Act, this now excludes a primary residence as being eligible as part of an investor’s net worth (investors who had existing accredited investments but who now fail the net-worth test without their residence being valued were grandfathered).

The information, suggestions, and recommendations included in this material is for informational purposes only and cannot be relied upon for any financial, legal or insurance purposes. Madrona Financial Services will not be held responsible for any detrimental reliance you place on this information. It is agreed that use of this information shall be on an “as is” basis and entirely at your own risk. Additionally, Madrona Financial Services cannot and does not guarantee the performance of any investment or insurance product. Insurance products are offered through Madrona Insurance Services, LLC, a licensed insurance agency and affiliate of Madrona Financial Services. Madrona Insurance Services and individual advisors affiliated with Madrona Insurance Services and Madrona Financial Services receives commissions on the sale of insurance products. Clients are not required to purchase insurance products recommended or to otherwise implement financial advice through Madrona affiliates. When we refer to preparation and filing of tax returns, tax returns are prepared and filed by our wholly-owned sister company Bauer Evans, Inc. P.S., a licensed certified public accounting firm. Madrona Financial Services, LLC is a registered investment adviser with the SEC. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training. DST investments are only available to accredited investors and are offered solely through the issuers offering documents. The DST sponsor determines whether to accept any individual’s subscription documents.