Unlocking the Potential of Delaware Statutory Trusts: A Guide to DST 1031 Exchanges

Are you considering a 1031 Exchange and are looking for a real estate investment strategy that can potentially streamline the challenges of finding high-quality replacement properties within the tight timeframe allowed by the IRS? Delaware Statutory Trusts (DSTs) could be your possible answer. 

Understanding Delaware Statutory Trusts

Delaware Statutory Trusts (DSTs) offer a range of benefits that appeal to investors looking for flexibility and tax-smart investment benefits when it comes to their real estate assets.  A Delaware Statutory Trust is a legal entity created under Delaware law. It allows investors to pool funds and create a beneficial interest in the real estate trust without the headaches of direct property ownership. 

This setup partially resembles a Limited Liability Company (LLC) investment, yet each investor holds an individual interest in the trust. A DST is established via a trust agreement and registered in Delaware. It’s managed by a trustee responsible for all decision-making, day-to-day maintenance and operations, and divesting of the property. Investors no longer have to directly manage their property, lease vacancies to tenants, collect rent, and/or handle property maintenance, allowing them to focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s - Tenants, Toilets, and Trash!). 

“A Delaware Statutory Trust is an entity that is used to hold title to investment real estate. In some ways, this is similar to how a Limited Liability Company (LLC) can hold title to real estate; however, unlike an LLC, a DST 1031 property will qualify as ‘like-kind’ exchange replacement property for a 1031 Exchange,” says Dwight Kay, the founder and CEO of Kay Properties and Investments, LLC and the www.kpi1031.com marketplace, which provides investors nationwide access to over 20 different DST sponsor companies typically 20-40 different DST investment offerings.

A DST entity can hold title to most types of real estate including triple net (NNN) leased retail buildings, multifamily apartment communities, self-storage facilities, warehouses and distribution facilities, and medical buildings. 

DSTs and 1031 Exchanges

A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains taxes by reinvesting proceeds from the sale of a property into a like-kind property. Understanding the requirements of a 1031 Exchange can be one of the most important strategies for investors interested in maximizing the tax deferral benefits. The steps involved in successfully completing a 1031 Exchange include the following: 

Step 1: 

Use a Qualified Intermediary (QI) – Upon the close of escrow of the relinquished (sold) property, the funds must be sent directly to a Qualified Intermediary who properly administers and documents the exchange for the taxpayer. For a list of 1031 exchange Qualified Intermediaries please register for free at www.kpi1031.com.

Step 2: 

Reinvest 100% of the net sales proceeds into the replacement properties.

Step 3: 

Purchase an equal or greater value in replacement properties as they had of relinquished property.

Step 4: 

Identify replacement properties within 45 days of closing escrow on the relinquished property.

Step 5: 

Closing on the replacement property must be the earlier of either 180 calendar days after closing on the sale of the relinquished property or the due date for filing the tax return for the year in which the relinquished property was sold; unless an automatic filing extension has been obtained.

Notes Dwight Kay, “One of the primary attractions of DSTs is their ability to create a very tax efficient 1031 Exchange. When investors sell a property, capital gains taxes can take a big chunk of the profits. DSTs offer a way to keep that money working for you. By reinvesting into DSTs via a 1031 Exchange, investors can defer taxes, which allows them to reinvest those funds for further investment, akin to keeping the snowball rolling downhill. DSTs and their beneficial ownership mechanism allow real estate investors to access large real estate assets without purchasing the whole property alone. By allowing investors to pool their resources via the beneficial or fractional ownership structure, a DST allows investors to potentially achieve various investment goals including the potential for greater diversification* through the ability to invest in a wide range of property types, from triple net leased properties to multifamily apartments, to medical buildings, to self-storage facilities and more. Investors aren't limited to a single market; they can spread their investments across multiple regions, reducing the risk associated with local economic changes.  It is important for all investors to understand that diversification does not ever guarantee protection against losses or guarantee appreciation or returns.  All investors are encouraged to read each DST investments Private Placement Memorandum – which can be accessed by registering at www.kpi1031.com – for a full discussion of the investment risks and business plan of the Delaware Statutory Trust.

How Delaware Statutory Trusts Help Investors Replace Debt in a 1031 Exchange

Unlike traditional property exchanges that often come with financing hurdles or undisclosed seller issues, DSTs can be remarkably straightforward in helping investors complete a 1031 Exchange. 

For one, DSTs are already pre-packaged with often all of the appraisals, environmental reports, property condition reports, financing, tenant estoppels, etc. having been completed. For this reason, a typical DST 1031 property can be closed within a few business days after submitting subscription documents. This is one of the reasons DST 1031 properties have become very popular with investors who are in their 45-day identification period and close to running the risk of a failed 1031 exchange and a major tax consequence. 

Another popular benefit of DSTs for 1031 exchange investors is that these properties often also have the debt component already structured and in place to satisfy the debt-replacement requirements of the 1031 Exchange. Because DSTs allow investors to purchase a fractional interest in the DST and because DSTs have a variety of financing ratios in place, investors don’t need to secure new financing, undergo personal credit checks, or provide extensive financial documentation to a lender. 

Finally, the financing used on DST 1031 properties is typically non-recourse to the investor. Non-recourse financing is defined as financing whereby the lender’s only remedy in the case of a default is the subject property itself. The lender is not able to pursue the investor’s other assets beyond the subject property. So, investors could lose their entire principal amount invested in the DST property in the case of a major tenant bankruptcy or other economic downturn, but their other assets would be protected from a lender. 

Types of Properties in DSTs

Delaware Statutory Trusts offer investors a unique opportunity to diversify their real estate portfolios without the hassles associated with direct ownership. Understanding the kinds of properties that can be part of a DST portfolio is crucial for making informed investment decisions. Let's explore some common property types featured in DSTs.

To get an idea of what a typical DST 1031 property can look like, here are some examples of previous DST 1031 properties. Kay Properties believes that essential services like medical facilities, industrial logistic centers, and multifamily residential buildings are well-suited for DST 1031 portfolios. Obviously, specific properties, tenants, lease terms, and financing structures will vary greatly depending on the individual DST offering. Please note all offerings discussed are fully subscribed and not available for investment and future offerings will vary greatly. 

Single Tenant Medical DST - A debt-free offering for a dialysis facility located in the Washington DC MSA that is backed by its corporate parent company and at the inception of the DST had 10 years remaining on the primary lease term with three five-year renewal options. The property is in a dense infill location and surrounded by national retailers.

Multifamily Community DST- A 50-unit Class A multifamily community located in Houston, TX. The property is 100% occupied and has a loan-to-value of 39.6%.

Airport Distribution DST - A 100% debt-free industrial net lease distribution facility Delaware Statutory Trust offering.

Utilizing Online Marketplaces for DST Investments

Navigating the world of Delaware Statutory Trusts can feel like wandering through a maze without a map. However, with Kay Properties' online marketplace, investors can find a clear path to explore DST opportunities.  Kay Properties believes it has created one of the largest 1031 exchange and real estate investment online marketplaces in the country that generates some of the largest DST 1031 investment volumes in the United States. This platform acts as a bridge, connecting investors with the right opportunities efficiently and transparently.

““The www.kpi1031.com online marketplace has truly become a best-in-class robust platform connecting high-net-worth investors with quality real estate offerings as well as a place for real estate sponsors and operators to connect with tens of thousands of high-net-worth investors seeking to deploy capital into real estate offerings. We think the platform creates a perfect match for all sides of the 1031 exchange and real estate investment equation.”

The www.kpi1031.com online marketplace for 1031 exchange investors provides a broad range of options for investors to consider. With a few clicks, investors can review numerous DST properties (typically 20-40 different DST properties) from around 20 different DST sponsor companies and select ones that align with their goals. This wealth of information empowers investors to make informed decisions. Finding a suitable property within the 45-day timeframe of a 1031 exchange can be stressful. The www.kpi1031.com online marketplace offers pre-packaged DST 1031 properties designed to simplify this process, eliminating many common headaches. 

By providing a clear picture of the risks and business plans through the DST Private Placement Memorandum, the Kay Properties marketplace helps to enhance investor confidence and encourage better financial decisions. Embracing the Kay Properties online marketplaces doesn't just make life easier for investors in Delaware Statutory Trusts—it transforms the whole experience.  So much so that thousands upon thousands of 1031 exchange investors nationwide have registered for free access at www.kpi1031.com.

Embracing the potential benefits of Delaware Statutory Trusts can significantly streamline real estate investments via a 1031 exchange. With pre-packaged DST 1031 properties, investors can bypass common hurdles like closing risks and last-minute property searches. These trusts provide a ready-to-go investment solution, complete with critical documents and evaluations, minimizing stress and uncertainty.  As always, each investor is encouraged to review the PPM with their CPA and attorney for a full review of the DST properties' business plan and risk factors.  

About Kay Properties and www.kpi1031.com: 

Kay Properties helps investors choose 1031 exchange investments that help them focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s - Tenants, Toilets, and Trash!). We have helped 1031 exchange investors for nearly two decades exchange into over 9,100 - 1031 exchange investments. Please visit www.kpi1031.com for access to our team’s experience, educational library, and our full 1031 exchange investment menu.

This material is not tax or legal advice. Please consult your CPA/attorney for guidance. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee returns and does not protect against loss. Potential cash flow, potential returns, and potential appreciation are not guaranteed. There is a risk of loss of the entire investment principal. Please read the Private Placement Memorandum (PPM) for the offerings' business plan and risk factors before investing. Securities are offered through FNEX Capital LLC member FINRA, SIPC.

Related Article:

• How to Choose a Coin to Invest in the Long Term
• Maximizing Returns with Delaware Statutory Trust Investments