What is a DST?
A Delaware Statutory Trusts, (DSTs), allow owners of real estate to sell their rental properties and potentially defer capital gains taxes. DSTs are derived from Delaware Statutory law as a separate legal entity.
DSTs also qualify as a 1031 like-kind exchange. 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, and potentially permanently eliminating capital gains and depreciation recapture to your heirs.
As a result DSTs have become an investment vehicle for investors who want the benefits of owning real estate investors who no longer want the day-to-day responsibilities of being a landlord, and those landlords that are concerned about future maintenance obligations of their aging properties.
What is the difference between a DST and a REIT?
While DSTs and REITs have some similarities and both invest in real estate, there are some major differences
An DST qualifies as a 1031 like-kind exchange to defer the taxes on the sale of your highly appreciated property, a REIT does not
A REIT typically owns more properties than a DST
A REIT can be integrated to diversify part of your qualified retirement plan, a DST can not
A REIT can be a publicly traded entity, or a private placement investment. A DST is a private placement investment
A REIT generally is more liquid than a DST.
What is a 1031 exchange?
A 1031 like-kind exchange allows an investor to potentially defer the capital gains tax on the sale of highly appreciated investment property by reinvesting the proceeds into qualifying investment real estate.
Does a DST qualify as a 1031 exchange?
Yes, 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.
Why not just buy into a REIT if you don’t need a 1031?
REITs (publicly traded) are generally large, own older buildings, buildings are highly depreciated, and trade like a stock, therefore, are volatile in valuation.
Private REITs often own more newly acquired real estate that isn’t highly depreciated. Many are liquid after one year, on a quarterly basis. Private REITs may be preferable to public REITs and DSTs when an investor does not need a 1031 exchange.
What are the benefits of a DST?
A DST can be a great way to enjoy the benefits of real estate ownership without dealing with the Terrible T’s of being a landlord; Tenants, Trash, and Toilets. As an investor in a DST you are not responsible for the property management.
A DST also qualifies as a 1031 like-kind exchange which means you may be able to defer the taxes on the sale of your highly appreciated property.
A DST can preserve the ability for a step-up in basis, potentially eliminating capital gains and depreciation recapture from income tax permanently.
With a DST you can invest in properties that are already income producing.
A DST can be easily divided amongst your heirs as part of your legacy planning.
DSTs typically invest in newer properties that have little repairs or deferred maintenance issues.
DSTs can offer diversity by property type and geographic location.
Can anyone invest in a DST?
No, in order to participate in a DST an investor must be an Accredited Investor. An Accredited Investor is defined as having a minimum of 1 million dollars of net worth (excluding the value of the investors primary residence) and or annual income of at least $200,000 individual, or $300,000 as spousal income.
Can I choose the type of property to invest in?
Yes, you have the opportunity to select the property you want to invest in. At Madrona Financial Services our CPAs vet every Sponsor and every investment property and we use a discipled set of investment criteria as part of our vetting process. This is all done before we present any opportunities to you.
Can I get regular income from a DST?
Yes, each DST quotes a different yield which comes from collected rents. You will receive monthly net rent checks from each DST investment
Can I leave a DST to my heirs?
Yes, a DST is an easily divided asset you can leave to your heirs as part of your legacy plan.
What are the internal management fees?
Generally, the DST Sponsor charges of gross rents (not of property value) as their property management fee.
How does Madrona get paid?
Please refer the Kiplinger article “How hidden Commissions Can Damage Non-Traded REITs and DSTs”. Madrona, acting as a Fiduciary, does not charge the typical 7-8.5% up-front commission to you. Instead, we charge an on-going management fee based on dollars invested.
Can I receive rent escalations?
Yes, depending on the property type. When the property is eventually sold you will receive your share of any appreciation and repair reserve balances.
What types of properties are available?
Here is a list of the possible property types available. Usually there are 2-4 DST types available at any given time.
I. Apartment complexes
IV. Self Storage
Would I invest in just one property?
Not normally, one DST might own 4 apartment complexes in 4 states. DSTs have a minimum investment of $100,000 each, so you would likely want to diversify into several DSTs.
What yields could I expect?
Usually about 4-5.25% net of fees on equity, plus appreciation on the DSTs.