Delaware Statutory Trusts/UPREITs/
1031 Exchange Options
The largest transfer of wealth is underway in our nation. The “Silver Tsunami” has begun and Baby Boomers, the wealthiest generation in the U.S., is set to transfer trillions of dollars of assets to their beneficiaries.
When looking at their total net worth, on average, 70% of their total net worth resides in two different asset classes – Real Estate and Qualified Investments (45% real estate & 25% qualified accounts).
Baby Boomers are now in retirement and are looking to enjoy the best time of their life and being a landlord is making it difficult.
- The Challenges of Being a Landlord
- Fully Depreciated Real Estate Assets = More Income Taxes
- Highly Appreciated Real Estate Assets = Capital Gains Taxes
- Costs Associated with Maintaining and Upkeeping Real Estate Investments
- And Many More . . .
What is a Delaware Statutory Trust – IRC: 2004-86
A Delaware Statutory Trust (DST) permits a fractional ownership structure, where multiple investors can share ownership in a single property or portfolio of properties which qualifies as replacement property as part of an investor’s 1031 exchange transaction. A DST takes all decision-making out of the hands of the investors and places it in the hands of an experienced sponsor-affiliated trustee.
Sell your property
Proceeds go to a Qualified Intermediary (QI)
Exchange into a DST, diversifying your portfolio
DST sells in 5-7 years and money goes back to QI
Choose whether to…
- Cash out
- Roll into a new DST
- Roll into a property
- Roll into a 721
REIT acquires the DST & investors receive OP units
12 months after DST is acquired…
- Monthly liquidity
- Exit at NAV
Benefits of a DST & UPREIT 1031 Exchange:
ESTATE PLANNING
Due to the fractional ownership nature of a DST, it allows for a more fair and easily divisible real estate asset at transfer and ultimately helps keep families together.
INSURANCE POLICY
If for some reason the investor cannot acquire physical property, a secondary DST option allows them to meet the exchange deadline and defer all taxes.
ACCESS TO INSTITUTIONAL- QUALITY PROPERTIES
Most real estate investors can’t afford to own multi-million dollar properties. DSTs allow investors to acquire partial ownership in these kinds of properties that are otherwise out-of-reach.
SWAP UNTIL YOU DROP
All 1031 exchange investments receive a Step-Up in Cost Basis so your heirs will not inherit the Capital Gains liability. The passive nature of a DST structure makes it easy for investors to keep exchanging until receiving the Step-Up.
LIMITED PERSONAL LIABILITY
Loans are nonrecourse to the investor. The DST is the sole borrower. This ensures that investors never have to worry about qualifying for a mortgage if they’re selling an investment property with a mortgage.
LIQUIDITY (721 UPREIT ONLY)
In an UPREIT structure, owners of units may have the ability to access liquidity options through the REIT. However, these liquidations may be a taxable transaction and the owner would recognize the tax liability at the time of the liquidation.
ELIMINATE BOOT
Any remaining profit on the sale of an investment property is considered “boot.” This excess cash (boot) can be invested in a DST to avoid paying taxes.
NO MANAGEMENT RESPONSIBILITIES
The DST/UPREIT is the single owner and agile decision maker on behalf of the investors.
DIVERSIFICATION
Investors can divide their investment among multiple DSTs, which may provide for a more diversified portfolio by geography and property types.
LOWER MINIMUM REQUIREMENT
DSTs can accommodate a minimum investment of most times $100,000.
DST Risks
- Beneficial owners possess limited control and rights. The trust will be operated and managed solely by the Trustee. Beneficial owners have no right to participate in the management of the trust.
- Beneficial owners do not have legal title. Beneficial owners do not have the right to sell the property.
Real Estate Risks
- Speculative market and financial risks associated with fluctuations in the real estate market.
- Loss of principal.
- Variations in occupancy may negatively impact cash flow.
- Limited liquidity.
- Limits on management control of property.
- Changes in value of the underlying investments.
Seven Rules to Protect Investors
- Once the offering is closed, no future contribution to the DST by current or new beneficial owners.
- Trustee cannot renegotiate the terms of existing loans or borrow new funds from any party.
- Trustee cannot reinvest the proceeds from the sale of its investment real estate. Proceeds must be distributed to beneficial owners.
- Trustee is limited to making capital expenditures with respect to the property for (a) normal repair and maintenance, (b) minor non-structural capital improvements, or (c) those required by law.
- Any cash held between distribution dates can only be invested in short-term debt obligations.
- All cash, other than necessary reserves, must be distributed on a current basis.
- Trustee cannot enter into new leases or renegotiate the current leases.