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The Basic Facts on DSTs and 1031s
By The Kay Properties Team People just beginning to explore commercial real estate investing opportunities often have questions about the different types of real estate ownership structures and specific tax benefits that may be available to them. But just what are DSTs and 1031s? This article offers some basic facts and explains how they can work together to benefit investors. What is a Delaware Statutory Trust? A Delaware Statutory Trust (DST) is an entity used to hold title to investments, including incomeproducing real estate. Most types of real estate can be owned in a DST, including retail, office and multifamily properties.
There can be up to 499 individual investors in a DST. Each investor holds an undivided fractional interest in the property. Decisionmaking authority typically rests with a trustee who is an experienced asset manager designated by the sponsor of the offering. The sponsor also can be an investor in the DST. A DST is considered a security and is governed by securities laws. Owners of a DST receive an operating statement at the end of the year showing their prorata portion of property income and expenses, in the same way that they would with any other commercial or rental properties that they may own directly.
What is a 1031 Like-Kind Exchange? One of the most attractive real estate tax benefits available in the U.S. is the like-kind exchange, which is governed by Section 1031 of the Internal Revenue Code. A like-kind exchange allows an investor to defer taxes on capital gains and depreciation recapture at the time a real property investment is sold if the net equity from the sale is reinvested into a similar property of the same or greater value. According to the Internal Revenue Service: “Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of May 2020 socalrha.org | 35
