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Delaware Statutory Trust Pros And Cons

What Are The Pros & Cons Of A Delaware Statutory Trust?

First lets go over what a Delaware Statutory Trust (DST) is. A Delaware Statutory Trust is a trust used in a 1031 exchange. If you are a rental property owner and looking to sell this property and defer the capital gains, you can utilize a 1031 exchange. A 1031 exchange could be used to exchange the proceeds of the sale of the rental property to acquire a like kind property. There are many rules and timelines that must be met in order to fulfill the requirements of the Internal Revenue Service. These stringent rules and guidelines is why many investors are turning to a 1031 exchange Delaware Statutory Trust  (DST).  Delaware Statutory Trust are established under the law of the state of Delaware and used as a pool of 35 or more investors to own a beneficial interest in a pool of real estate. Delaware Statutory Trust are similar to tenancy in common (TIC) but differ in many ways. 

Delaware Statutory Trust Pros In A 1031 Exchange

Some the Delaware Statutory Trust Pros is the fact that you can defer the capital gains from the sale of your real estate. Once sell the property you can use a qualified intermediary (QI) to hold your proceeds in escrow without taking ownership, thus deferring the capital gains. In a traditional 1031 exchange, you have 3 rules you must follow to meet the requirements of the Internal Revenue Service. These rules could be hard to achieve making it difficult to accomplish a traditional 1031 exchange. One of the 1031 exchange Delaware Statutory Trust Pros is the ability to meet these rules easily. The Pro to a Delaware Statutory Trust is that there is typically a pool of real estate of 3 or more that you can identify, thus meeting the requirements of the IRS. Having the ability to meet the rules of the IRS is a Delaware Statutory Trust Pro. Once you have identified the portfolio of properties from a Delaware Statutory Trust, your proceeds from the sale of your property is invested into the Delaware Statutory Trust. You will own a fractional interest in the Delaware Statutory Trust portfolio of properties. Another Delaware Statutory Trust Pro is the direct investment into this pool of properties without having to manage these properties, or pay for a monthly property management service. Eliminating the property management overhead expense, and stress, is a HUGE Delaware Statutory Trust pro! Once invested in the Delaware Statutory Trust you will start receiving monthly distribution income as if you were the landlord based on your fractional interest. Receiving monthly income from these Delaware Statutory Trust without the management is a DST pro in my book! 

If you are a partner in a rental property investment, the Delaware Statutory Trust allows you to invest the proceeds of the property into the DST and your partners can take their share in the rental property and pay the capital gains. The ability to investment a specified amount is a Delaware Statutory Trust Pro! Once invested into a DST, if you have many children or beneficiaries, your beneficiaries can sell off their fractional interest and not remain in the DST. The freedom to allow your beneficiaries to sell their fractional interest without having to have a unanimous decision is a Delaware Statutory Trust Pro! 

With all these Delaware Statutory Trust Pros, there must be some Delaware Statutory Trust Cons...Yes there are some Delaware Statutory Trust Cons, and we will go over some of the drawbacks of using a  DST. 

 Delaware Statutory Trust Cons In A 1031 Exchange

A Delaware Statutory Trust Con typically requires a minimum of a $25,000 investment. If you have a small rental property not over the $25,000 market value, you may not qualify for the DST. If you do meet this requirement, and invest into a DST, your investment is illiquid. This lack of liquidity could be a Delaware Statutory Trust Con for some people. In order to have a successful portfolio, the investment timeline is typically 10 years. If you do not have a long term investment horizon, this could be a Delaware Statutory Trust Con. If before 10 years, you are looking to liquidate your 1031 exchange DST, you must sell your fractional interest to either the pool of investors, or outside investors. Having to find a buyer of your fractional interest in the DST could be a Delaware Statutory Trust Con. 

As you can see the Delaware Statutory Trust Pros outweigh the Delaware Statutory Trust Cons. If you are considering utilizing the 1031 exchange DST for your property, we can help you! You can email or call 805-603-4378 to learn more about the 1031 exchange DST! 


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