Delaware Statutory Trusts (DSTs) open the door for unique investment opportunities, acting as fractional ownership in real estate properties. But how do Delaware Statutory Trusts benefit investors further? Let’s find out.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust, a DST, is a real estate investment type involving numerous investors, each obtaining fractional property interests. In some scenarios, investors can’t afford complete ownership of properties. So, DSTs allow for broader investor capabilities and permit them to receive distributions from the trust operation, either through eventual property sales or rental income.
Why Are DSTs Growing in Popularity?
There are many reasons why Delaware Statutory Trusts have gained popularity in the United States. The combinations of highly appreciated real estate values, low investment returns, and aging demographics impact the growing popularity of DSTs.
These advantages have resulted in the recent rise in Delaware Statutory Trusts. Delaware Statutory Trusts requirements include falling into a few different commercial or business property types; office, industrial, multifamily, or retail properties comprising institution-grade assets.
Benefits of Delaware Statutory Trusts
Delaware Statutory Trusts can benefit investors in many ways. In cases of investors needing an alternative to 1031 exchanges or not wanting to deal with property maintenance, the benefits of DSTs are plentiful.
Allows Deferment of Capital Gains Tax
One significant benefit to Delaware Statutory Trusts is the ability for investors to defer capital gains taxes. It helps reduce tax liability, thus allowing continuous reinvestment and indefinite deferment. As a result, investments can continuously work for investors, rather than paying large portions of sales profits, buying bigger, promising properties to build wealth.
Permits Investment Diversification
Diversification is one of the significant upsides of DSTs. It’s essential for any investment portfolio, as it helps maximizes potential higher returns while mitigating risks. Furthermore, investors can place small investments into high-value properties, with the low entry costs permitting investment in multiple DTSs. Finally, it’s an easier asset management method, as investors don’t carry the decision-making responsibilities.
Professional Management
Delaware Statutory Trusts allow investors to step away from significant decision-making responsibilities, leaving it to professional managers of the investment to take up those duties. Responsibilities such as overseeing property maintenance, tenant management, and regular upkeep performance remain in the manager’s hands, along with notifying the investors of any changes.
Potential Risks to DSTs
One potential downside to Delaware Statutory Trusts investors should know is the loss of control. The IRS won’t permit investors to have direct operational control over a property, thus leaving them with no decision-making capabilities. However, because of the control restrictions, this can benefit investors, especially those with large portfolios who don’t have the time to take on managerial responsibilities.
Secondly, DSTs have similar economic risks as typical real estate investments. Depending on the property manager and asset class, it can determine how well the property performs. However, other factors, such as the economy’s health, can influence the real estate market. A recession can impact DST returns, risking bankruptcy failure, thus losing the investment.
How Delaware Statutory Trusts Benefit Investors
