Are you searching for a way to invest your 1031 exchange proceeds without the burden of debt? All cash Delaware Statutory Trusts (DSTs) could be the answer. These tax advantaged investment structures allow you to eliminate the day-to-day headaches of property management while accessing large real estate assets that would otherwise be outside of an individual investor’s price point through the power of beneficial ownership structure all while staying debt free.
Dwight Kay , Founder and CEO of Kay Properties and Investments, explores how certain DSTs can help you achieve a 1031 exchange solution while remaining debt free.
These DSTs hold unique features and offer potential advantages that are becoming increasingly popular among tax-smart investors. Understanding the power of debt-free DSTs is vital for anyone looking to navigate today’s complex real estate landscape as they are searching for 1031 exchange-like kind opportunities.
Understanding Delaware Statutory Trusts Delaware Statutory Trusts (DSTs) that are offered on an all-cash/debt-free basis offer an innovative way to approach real estate investments that work for a 1031 exchange while also creating a risk mitigation strategy. Investors who want to explore options in this realm must first understand how DSTs function.
Legal Framework and Benefits The legal foundation of Delaware Statutory Trusts provides several benefits, particularly in terms of liability protection and tax advantages. For example, many investors use DSTs to defer capital gains taxes using a 1031 exchange following the sale of a piece of investment real estate. This type of exchange allows investors to reinvest the proceeds from the sale of one property into a DST without immediately paying taxes on the gains.
“Many of our clients have wanted to sell their apartment rentals and commercial properties for years but haven’t been able to find a property to 1031 exchange into and just can’t stomach the tax bill after adding up federal capital gains tax, state capital gains tax, depreciation recapture tax, and the Medicare surtax. DSTs provide investors the ability to move from an active to a passive role of real estate ownership on a tax deferred-basis,” said Kay.
In addition, Kay also pointed out that DSTs allow for investors to benefit from a beneficial ownership structure which means you can invest in a property without needing to buy it completely,” says Dwight Kay . “This opens the door to being able to access larger properties than you might now be able to afford on your own. Also, because investors are able to invest across multiple asset classes, across a variety of tenant profiles, and throughout multiple geographic locations, investors have the potential to achieve greater diversification than if they just purchased a single property on their own. Of course, it is important to note that diversification does not guarantee returns and does not protect against losses,” said Dwight Kay .
DST Investment Structure The investment structure of Delaware Statutory Trusts is unique and growing in popularity among real estate and 1031 exchange investors. Generally, a DST is formed when a DST sponsor purchases a property and then offers shares of the trust to investors. Each investor owns a beneficial interest, which means they share in both the potential income generated and the potential appreciation of the property.
Typically, the types of assets involved in DST investments include commercial real estate, such as medical buildings, industrial facilities, and multifamily properties. These assets tend to provide the potential for monthly distributions of rent to investors.
Investing in a DST means you are no longer handling property management as you used to. All the burdens of active property management are now the responsibility of the asset management team at the DST sponsor company.
This beneficial interest structure of DSTs also allows investors to invest with a lower investment amount than if you had to purchase the property all by yourself. This accessibility can be appealing to those looking investors wanting to avoid the risk of over-concentrating their investment dollars into just one property. Because of the lower investment amounts, investors can access institutional grade real estate with smaller dollar amounts.
Notes Kay, “Investing in Delaware Statutory Trusts combines the potential benefits of professional management, monthly income potential and tax advantages.”
Credits: Unsplash Debt-Free Investment Strategies with DSTs Delaware Statutory Trusts (DSTs) also offer you a unique way to invest in real estate at different levels of risk and debt. There are many DST properties available with leverage (typically between 30% -65%+ LTV), but some investors are not comfortable with taking on additional debt, and that’s where debt-free DSTs come into play.
For those investors who are considering avoiding leveraged DSTs and would rather instead invest in debt-free Delaware Statutory Trust properties, there are four compelling reasons investors often choose debt-free DSTs. These include:
Protection from Lender Foreclosure
Potential for Higher Projected Cash Flow
Avoiding Refinancing Risks
No Balloon Mortgage Maturity
Potential for Higher Projected Cash Flow: debt free DSTs can potentially provide investors a greater monthly net cash flow potential. As always, it is important to remember that DSTs, whether those with debt or those that are debt free, have no guarantees for monthly cash flow and that distributions could always be lower than anticipated in DSTs and any real estate investment. Please read each DSTs Private Placement Memorandum (PPM) for a full discussion of risk factors prior to considering an investment. For more information please register at www.kpi1031.com.
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Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment. Please speak with your attorney and CPA before considering an investment. All offerings discussed, if any, are Regulation D, Rule 506c offerings. Past performance is not a guarantee of future results. Securities offered through FNEX Capital, member FINRA, SIPC.
