Why The Investors Are Choosing DSTs Over REITs

It is not very rare to argue that the more you invest, the more you make. So if you could defer paying taxes and use that money to increase your next investment amount, wouldn’t you do it?

Of course, you would at least look into it. Let us answer some questions about 1031 Exchanges– DSTs and REITs.

How can you use tax money to increase your investment amount?

The IRC (Internal Revenue Code) Section 1031 provides allowances for owners of business or investment properties to exchange their property for new business or investment property without paying capital gain taxes on the sale of the relinquished property. The taxes are deferred, allowing the investor to invest a larger amount in the replacement property. Here’s what we intend:

What does that have to do with REITs and DSTs?

The DST (Delaware Statutory Trust) is a separate legal entity created as a trust under Delaware statutory law, which allows a very flexible approach to the design and performance of the entity. Investors in a Delaware Statutory Trust own a pro-rata interest in the trust and have the right to obtain distributions from the operation of the trust, either from the sale of the assets or rental income.

IRS Revenue Ruling 2004-86 determines that a beneficial interest in a DST that owned real estate assets will be considered as a “direct interest in real estate” and, thus, could qualify as a tax-deferrable real estate investment. After completing a DST investment, beneficial owners can engage in a 1031 exchange by buying beneficial interests in another eligible real estate or DST investment. Moreover, an investor who sells a tax-deferrable real estate investment can purchase beneficial interests in a DST as a like-kind replacement property to perform their 1031 exchange.

A REIT (Real Estate Investment Trust) is another type of trust that owns real estate, offers stock shares to investors, and distributes its net operating income to stockholders. However, a large difference is there in the requirements and regulations by which each trust must operate. The investors under REIT are not considered to have a direct interest in the real estate owned by the REIT and, hence, do not own real estate that can be exchanged in a tax-deferred 1031 exchange

So if you love the idea of deferring capital gain taxes to increase the investment amount in real estate, a DST rather than REIT is a way to go.

Is a DST the only way to do a 1031 exchange?

No. You must have direct ownership in investment real estate or business to do a 1031 exchange. That direct ownership can be achieved as an individual, through a Delaware Statutory Trust (DST) or through a TIC (Tenant in Common) which has been less popular lately. We like DSTs as an investment means because they compare so closely to the comfort and advantages of REITs.

Like REITs, DST investors:

  • Receive distributions for all income earned by the fund,
  • Do not have deeded title of the real estate and, therefore, have limited liability for the real estate,
  • Do not need to disclose personal information for consideration by the lender,
  • Are not liable for making operating decisions,
  • Are not liable for managing the real estate, and
  • Buy shares as a security.

What do you think? With this information, will you choose a DST over a REIT as well? Take a look at our offerings on our website and see if any are right for you.

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1031Sponsors.com is a web portal owned by Investment.Net, LLC. The company is functioning in the 1031 exchange market for more than 15 years. Neither Investment.Net nor 1031Property intend to act as a broker or sell any goods or services. 1031Sponsors does not offer legal or tax advice. Tax topics discussed are for educational purposes only and should not be considered professional tax advice. It's recommended that you discuss your situation with your tax or legal advisor. Distributing an investment in different assets or choosing alternative investments involves higher risks than traditional investments and shouldn't be taken for granted. All alternative investment strategies are sold along with a prospectus that discloses all risks, fees, and expenses. These investments are not tax-efficient, and an investor should consult with his/her tax advisor before investing. The investor should be prepared to bear loss knowing that financial risks are attached to such investments.

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