How to set up a Delaware Statutory Trust?

Over the years, we get a lot of questions relating to the Delaware Statutory Trust. We decided to compile a list of common questions we get from our clients like How to set up a Delaware Statutory Trust? If you are looking to set up a Delaware Statutory Trust because you are selling a rental property, then you can review the questions and answers relating to Delaware Statutory Trust below. Setting up a DST is a quick and easy process for our team. When it comes to setting up a DST, we want to make sure you fully understand what a DST is before you set one up with our firm. If you have 1031 exchange DST questions that are not answered below, you can fill out the form below or call our office directly 805-583-2720 and we will help answer any questions you have regarding the 1031 Delaware Statutory Trust for Free. If you would like to visit the Winthco Wealth Management office in person to discuss how to setup a 1031 DST, you can do so at - 1871 Tapo St. Simi Valley California 93063.

• Please confirm the year numbers the investment has to be held in the corporation name before it can be divided to shareholders as individual owners?

The DST must 1031 exchange with the exact tax reporting ID into the DST to defer the capital gains tax. After 1 year, you are allowed to change ownership/tax reporting per each individual shareholder. If you setup your DST this way, it can be changed after roughly a year. 

• When that transfer takes place from corporate ownership to individual shareholder ownership, is that considered a taxable event?

No. The tax reporting change within the DST is simply paperwork. We work with the qualified intermediary when we setup your Delaware Statutory Trust to ensure your capital gains are deferred.  

• Please confirm the number of years it needs to be held once transferred into individuals names before an individual can cash-out?

The DST must be held for 1 year with the current tax reporting ID. An individual may cash out his/her fractional interest when the DST property sells. The average hold time of a DST property is 5-7 years. An individual may sell his/her fractional interest at anytime. A Delaware Statutory Trust investment is an illiquid investment. There is a process to sell your fractional interest which would be best described in detail on a phone call.

•  I read on your website "DST 1031 exchange  properties are only available to accredited investors. An accredited investor (1) is generally defined as an investor with a net worth (assets minus liabilities) of greater than $1 million, exclusive of primary residence. That being said, there are a number of ways that an entity can potentially qualify as an accredited investor,”  Does this mean that after we initially invest first as the corporation, that our corporation's younger shareholders who do not have a net worth of over 1 million dollars can not have their shares of ownership transferred from our corporation to individual ownership in any DELAWARE STATUTORY TRUSTS’s?

When we setup the Delaware Statutory Trust we need to verify all investors are in fact accredited investors. We typically setup the DST by having our potential investors send us their most recent tax return, investment accounts, or retirement accounts showing the net worth over $1m. This is how you setup a Delaware Statutory Trust in complinace with the SEC and FINRA. 

• If that is correct, and can’t happen, what is the common workaround family corporations do?

We would have to run this by the DST company based on the individual. This topic would be best covered with a conference call with all shareholders and the DST company rep. When we setup the Delaware Statutory Trust, if there are questions that we cannot answer we will consult with our DST sponsor, or broker dealer for the correct answer. We want to ensure we setup the Delaware Statutory trust the right way! 

•  How are fees based on initial purchase when you setup a DST?

The fees for a dst range from 5-9% when you setup a Delaware Statutory Trust. The fees are all factored into the DST. There is no up front cost/fee to invest into the DST. If you net $5m from the sale of your property, the full $5m would go into the DST and that is the amount that you receive the passive monthly income on. The fees are factored into your fractional ownership. You are buying the DST properties at a premium. The fees can be negated with the appreciation of the dst properties. If the total fees come to 7% and the dst property sells with a 10% appreciation, you would net 3% appreciation on the initial investment. Before we setup a Delaware Statutory Trust with our clients, we want to make sure every client knows what the fees are and how the work. 

• How difficult is it to cash out after you setup a Delaware Statutory Trust ?

A DST investment is an illiquid investment with an average hold time of 5-7 years. If there is an emergency scenario where an investor needs to cash out their ownership, we would work with you and the DST company to find an internal buyer to purchase your fractional ownership. It is not as easy as selling stocks/mutual finds. It is feasible, but you may have to sell your ownership at a discount. There is no secondary market to sell DST ownership at this time. Before we setup a Delaware Statutory Trust for our potential investors, we want to make sure they know the DST is illiquid and meant to be held for an average of 5-7 years. 

• How are fees based on cashing out after you setup a Delaware Statutory Trust?

There are no additional fees to cash out. Please see the answer above regarding initial purchase fees 

• Once in a DST, and the DST managers flip out of a portfolio we are invested in, does everyone in that group have the option to continue being invested in the next portfolio purchase to avoid taxes?

Yes. When the dst properties sell, you have multiple options when you setup a Delaware Statutory Trust. Cash out, pay the capital gains tax. 1031 exchange into another dst portfolio, or multiple portfolios. Take a portion of cash out, pay the capital gains tax, 1031 exchange the rest into another dst portfolio.  

• Referring to the previous question, are there times where that hasn’t worked and some investors are left out and have to pay taxes after they setup a Delaware Statutory Trust?

Personally, I have not seen this happen before. We work with multiple DST companies. There are typically 3-6 different dst portfolios available to us at any given time.

• How are fees based if an individual rolls into a new DST portfolio offering when setting up a new Delaware Statutory Trust?

The fees work the same way as if you were initially setting up a DST. The fees for a dst range from 5-9%. The fees are all factored into the DST. There is no up front cost/fee to invest into the DST. If you net $5m from the sale of your property, the full $5m would go into the DST and that is the amount that you receive the passive monthly income on. The fees are factored into your fractional ownership. You are buying the DST properties at a premium. The fees can be negated with the appreciation of the dst properties. If the total fees come to 7% and the dst property sells with a 10% appreciation, you would net 3% appreciation on the initial investment. The fees work the same way when you setup a Delaware Statutory Trust and when you 1031 exchange from DST to DST. 

•  If an individual wants to move out of the DST and purchase their own commercial property, can they place that money in some kind of "holding account" then reinvest that full amount of cash into a commercial property on their own?  Will that be a taxable event after they setup a Delaware Statutory Trust?

Yes. When the DST properties sell you can take all of the proceeds and 1031 exchange them into a physical property. You need to setup a qualified intermediary account to defer the capital gains tax. This is something that can be done after you setup the Delaware Statutory Trust and the property sells. 

•  If yes, to the previous question, what is the timeframe between cashing out and reinvesting after setting up a DST?

Once the funds are held with the qualified intermediary, you have 45 days to identify your replacement property and 180 days to close on the replacement property.

•  If an individual would like to move an investment out of a DST to another companies DST, is that allowed? Any taxes need to be paid after you setup a Delaware Statutory Trust?

Yes. Once the dst property sells, you can 1031 exchange into another DST company. Taxes can deferred utilizing the qualified intermediary to divert the proceeds to another DST company. This process begins all over for your to setup a new Delaware Statutory Trust.

• Do you have team members that handle the sale of our properties so the timing corresponds with DST offerings, or do you work directly with our real estate broker before you setup the Delaware Statutory Trust?

We do not have any licensed real estate agents on our team. We will work with your real estate broker to find all available dst portfolios from as many dst companies that are available. We will present all available dst portfolios as you are getting close to closing escrow and within your 45 day identification period. We can coordinate with your real estate broker before we setup a Delaware Statutory Trust to ensure the transaction fully defers any and all capital gains tax. 

•  The $5-6 million dollars of the investment is mainly being used as retirement income for the older shareholders. Do you recommend dividing the $5-6 million into two, three or four different DST portfolios when setting up the Delaware Statutory Trust? 

Yes, we always advise to diversify into as many dst portfolios as possible. Before we setup your Delaware Statutory Trust we go over all available portfolios with you.  Based on your risk tolerance, we will find all portfolios that fit you and the other shareholders needs. Some dst portfolios may have 4-6/ (10-20 in a public storage portfolio) properties within one portfolio. You could end up with 20+ properties with 3-4 different dst portfolios for good strong diversification.

• If yes, do you recommend two different types of portfolio for example: one retail, one industrial etc when opening a Delware Statutory Trust?

Yes. Multifamily, public storage, Amazon fulfillment center, medical buildings, are all great class A properties to diversify into. We will go over all of these asset classes and portfolios with you prior to setting up Delaware Statutory Trust

• How difficult would it be to find multiple high quality DST portfolios to invest in after our sale?

Not difficult at all. We work with many different DST companies with access to many different DST portfolios. We will present all available portfolios to you prior to you opening a Delaware Statutory Trust. 

• Is the management team of your company invested in the portfolios you recommend that you help setup a DST?

No. We do not have any real estate investors on our team. We have put many of our own internal clients, as well as relatives into DST portfolios.

•  Is there a company that objectively rates DST’s prior to setting up the Delaware Statutory Trust?

I have not heard of a company that rates DST companies/portfolios. We only work with the largest DST companies in the US for diversification and capital preservation.

• How did the portfolios you placed clients in do in 2020 regarding COVID and tenants rent payments before you setup a
  DST?

All dst portfolios that we put clients into in 2020 retained 95-97% of rents. Multifamily and public storage remain the strongest dst portfolios with minimal impact to COVID. We placed a few clients into a Nashville Hospitality DST portfolio that offered a higher cash on cash distribution rate. Covid impacted the hospitality industry, and the distribution were paused until the hotel can fully re open to optimal capacity. This is will we place clients into multiple portfolios. The clients we placed into the Nashville DST had a small position and were comfortable with the risk tolerance. We like to go over all of these stats prior to our clients setting up a Delaware Statutory Trust with us. 

How to set up a Delaware Statutory Trust

How to set up a Delaware Statutory Trust For A 1031 Exchange To Defer Capital Gains Tax

*Disclosure:

This website is neither an offer to sell nor a solicitation of an offer to buy any security which can be made only by a prospectus, or offering memorandum, which has been filed or registered with appropriate state and federal regulatory agencies, and sold only by broker dealers and registered investment advisors authorized to do so.

Additionally, we cannot offer any of our open offerings unless we have a pre-existing relationship with a customer.  Once we have obtained sufficient information to perform an evaluation of our new customers’ financial circumstances and sophistication in determining his or her status as an accredited investor, we would be able to discuss future offerings once they become available.