A Delaware Statutory Trust (DST) is a legally recognized trust, used in a variety of transactions and structures. Its flexibility of operation and management, plus the limited liability granted to beneficial owners, have made the DST a popular vehicle for a wide array of business purposes. A DST may own one or more properties across diverse asset classes: multifamily residential real estate; net leased retail; medical office portfolios; industrial property, among others. Here are some other benefits:
No Management Responsibilities
DSTs are managed by professional, third-party firms. For investors transitioning from actively managing properties to passive ownership, this alleviates the burden of day-to-day management and replaces it with the freedom of time for travel and leisure.
Tax-Sheltered Monthly Income Distributions
Distributions from cash flow are paid monthly. Because DST investors are deemed to have direct ownership of real estate, the benefits of direct ownership, such as mortgage interest deductions and depreciation, flow through to investors on a pro-rata basis. Because of this, income from DSTs is often tax-sheltered, making for a greater tax-equivalent yield.
Because of the fractional-ownership and low minimum investment of DSTs, clients are able to replace their investment with a portfolio of commercial real estate that provides diversification of asset class, geography and even DST sponsor. This helps to mitigate investment risk.
Ease of Ownership
The rules and deadlines of a 1031 exchange, such as the “45-day identification period,” can be difficult to maneuver. DSTs are pre-vetted and already acquired, ready for an investor’s exchange. The closing process into a DST can take as little as two business days. For investors at the end of their 45-day ID period who have not yet found a suitable replacement property, DSTs can offer an immediate and simple solution. For this same reason, DSTs also make for great back-up properties, in case there are complications with a sole-property acquisition.
Higher-Value Real Estate
A DST is a pooled-equity investment which allows investors to collectively purchase a property of higher value by aggregating their equity together. This allows DST investors to purchase properties that would otherwise be out of a single investor’s reach. As an example, a DST investor could go from owning 100% of a local apartment to owning 1.20% of a $50 million class A apartment complex in Denver, CO.
DSTs, like traditional real estate upon an owner’s passing, provide heirs with a step-up in cost basis. This means that heirs do not receive the owner’s original cost basis, but a “stepped-up” basis as of the date of death. This is true even if the owner has performed multiple 1031 exchanges. DSTs can also relieve the anxiety and problems that can occur when real estate is transferred to heirs.
A Delaware Statutory Trust (DST) is a legally recognized trust, used in a variety of transactions and structures. Its flexibility of operation and management, plus the limited liability granted to beneficial owners, have made the DST a popular vehicle for a wide array of business purposes.
In accordance with I.R.S. Revenue Ruling 2004- 86, beneficial interests in a Delaware Statutory Trust may be considered “like-kind” replacement property in a Section 1031 exchange. Title to property is held by the trust as a separate legal entity for the benefit of a beneficial owner, rather than directly, affording liability protection to the owners. Interests in the DST are considered securities under federal securities law, however, they retain treatment as ownership in real estate.
For exchange purposes, DSTs are 100% passive, turn-key investments offered by nationally recognized real estate management companies, referred to as “sponsors.” Sponsors perform the initial due diligence, structure the property acquisition, maintain and lease the property, collect rent, service the mortgage and eventually sell the property. A DST may own one or more properties across diverse asset classes: multifamily residential real estate; net leased retail; medical office portfolios; industrial property, among others.
Clark Wealth Strategies, Inc. provides clients with methodical, fiduciary guidance throughout the entire 1031 exchange. We have established a unique fiduciary process to help facilitate exchanges for clients all across the country, saving them thousands of dollars in unnecessary commissions.
Because of our independence, we are not beholden to any parent company or broker/dealer. No one is giving us a menu of investments that are to be sold to our clients. Instead, we have the freedom to use any solutions and strategies we choose, as long as it is in the best interest of our clients.
Utilizing Delaware Statutory Trusts (DSTs) and other strategies, we are able to create broadly diverse replacement real estate portfolios. DSTs allow for fractional ownership of commercial real estate and easy diversification across asset class and geography.
Any sales commissions or broker/dealer fees normally associated with DSTs are credited back to our clients in the form of additional DST equity. The end result is a very diverse replacement real estate portfolio, additional equity and a higher tax-sheltered monthly income.
Basics of a 1031 Exchange
Section 1031 of the Internal Revenue Code allows an investor to defer the payment of capital gains and depreciation recapture taxes that may arise from the sale of investment real estate. By using the proceeds of this sale to acquire “like-kind” real estate, taxes may be deferred, as long as the investor meets certain conditions and deadlines.
The replacement property must be like-kind to the relinquished property. Generally, real estate held for business or investment purposes in the United States is considered “like-kind,” including commercial and residential property.
Timeline of an Exchange
Within 45 calendar days following the closing of the relinquished property, the exchanger must identify potential replacement property(ies). Within 180 calendar days following the closing of the relinquished property, the replacement property(ies) must be purchased.
Typical 1031 Exchange Process
- Exchanger sells investment property, known as the relinquished property.
- Proceeds are escrowed with a Qualified Intermediary (QI) at close of sale.
- Exchanger identifies replacement property(ies) within 45 days of sale and notifies QI.
- Identification of Replacement Property:
- 3 Property Rule – identify up to 3 properties without regard to fair market value.
- 200% Rule – identify 4 or more properties, if the total fair market value of all properties does not exceed 200% of the total fair market value of all Relinquished Properties.
- Identification of Replacement Property:
- 95% Rule – identify any number of properties as long as the Replacement Properties acquired amount to at least 95% of the fair market value of all identified properties.
- The QI transfers funds for purchase of replacement property(ies). Exchanger must close on replacement investment property(ies) within 180 days of the closing date of the relinquished property.
What can you expect from your relationship with Clark Wealth Strategies?
Trust, Integrity, Accountability and Transparency. These are bedrock principles of our wealth management process. No matter what stage of life you find yourself in, we are uniquely positioned to help you find success.
Holistic Wealth Planning
While many firms are content to sell you commissionable products that may or may not be suitable, Clark Wealth Strategies focuses on a holistic approach to wealth management. Simply put, we know that your financial goals are intimately interconnected to your personal and life goals, so we leave no stone unturned in our pursuit for financial freedom.
The Fiduciary Standard
According to the Investment Act of 1940, investment advisors like Clark Wealth Strategies must act in accordance with the Fiduciary Standard. This means we have a legal responsibility to put our clients’ interests ahead of our own and act with loyalty and care, as well as eliminate or disclose any/all conflicts of interest. Transparency and accountability are at the center of everything we do.
1031 Exchange Experts
If you own investment property(ies) and are thinking about selling; you should consider Section 1031 of the Internal Revenue Code and all your options. The 1031 exchange can allow for the deferral of all capital gains, depreciation recapture and investment taxes. At Clark Wealth Strategies we provide clients with methodical, fiduciary advice throughout the exchange process and beyond.
At Clark Wealth Strategies, our clients are at the center of everything we do. They lead busy lives, with many family, work and charitable commitments. Our clients have neither the time, nor the interest, to manage their complicated financial and investment affairs alone. Instead, they look to Clark Wealth Strategies to operate as their advisor and fiduciary. In turn, Clark Wealth Strategies has the expertise, experience and independence to find and develop the appropriate wealth management strategies. We invite you to learn more about our wealth management process.
- We believe in a holistic approach to wealth management and guide each client through a tailored process based on what is most important to them. Whether it is retirement, college planning, investment real estate or even complex estate planning, Clark Wealth Strategies has the experience and integrity to successfully address the issue.
- As a fee-only registered investment advisory firm, Clark Wealth Strategies, Inc. operates in accordance with the Fiduciary Standard. Simply stated, we are bound by law to put our clients’ interests ahead of our own. We take this standard to heart and continually strive to be a trusted advisor, providing conflict-free advice and objective investment management solutions.
- If you are considering the sale of investment real estate, it is important to consider a 1031 tax-deferred exchange. A 1031 exchange allows you to defer capital gains, depreciation recapture and investment taxes and reinvest the entire proceeds into other investment real estate. However, there are strict rules and timelines that must be followed.
Thanks for visiting our website. Here is a little bit about ourselves:
Clark Wealth Strategies, Inc. is an independently registered investment advisory firm that is focused on providing cutting-edge wealth management solutions.
David B. Clark, founder and CEO of Clark Wealth Strategies, has been providing wealth management solutions for clients for over 23 years. He believes strongly in the fiduciary standard, where transparency and integrity are paramount.
When away from the office, Dave is busy playing soccer, working outside and chasing his family around. His wife, Bethany, runs a medical training company and together they have three children.