PASSIVE REAL ESTATE INVESTING – CALIFORNIA
About DSTs
They are derived from Delaware statutory law and formed as private governing agreements for the purposes of managing, administering, investing, and/or operating real, tangible, and intangible property; or business or professional activities for profit that are carried on by a person or group of people who act as trustees. DSTs have been around for some years. In 2004, the IRS released an official revenue ruling detailing how a DST could be structured so that it would qualify for 1031 Exchanges. A 1031 Exchange allows real estate investors to defer capital gains tax on the sale of an investment property by reinvesting the proceeds in a similar qualifying property and is known as a “like-kind exchange.”
In simple terms, a DST can give investors the benefits of owning real estate without the responsibilities and inconveniences of being a landlord. So, how does a DST work? First, a property is acquired under a DST by a sponsoring real estate investment firm, which opens the trust for investors to purchase a beneficial interest in a property that would otherwise be out of reach for them from an investment standpoint. Investors can then potentially receive passive income from a professionally managed property where they don’t have landlord responsibilities.
Other benefits include being able to cash out of a highly appreciated property into an income-producing company (such as a major commercial estate property) AND potentially defer capital gains with a 1031 exchange. In terms of your estate plan, it can be easier to divide up a DST than an investment property.
What is the Value of a DST?
If you own highly appreciated investment property, you might be hesitant to cash out due to the high tax bill. A DST qualifies as a like-kind exchange, which means you may be able to defer your tax bill and still potentially receive investment income without actively managing a property. Sponsoring firms can present a portfolio of properties to choose from and help find one that best suits your investment strategy.
A DST can be a great way to avoid the “Terrible Ts” of being a landlord — trash, tenants, and toilets. Being a landlord can turn into a full-time job, or even a nightmare, when things go wrong with tenants or there are many repairs to be made. While you can hire a property manager for an investment property, this can be expensive and can still cause hassles. Whether you’re looking to travel more, want to fully retire from being a landlord, or are simply too busy to manage a property, a DST can be a great way to still enjoy the benefits of real estate ownership. Many of the properties have professional management already in place, so you don’t need to be involved in the upkeep or the maintenance. There are additional potential benefits as well:
- A DST can solve the problem real estate investors have when they want to use a like-kind 1031 exchange but can’t find a suitable replacement in time. Similar to a 1031 exchange, a DST allows investors to defer taxes on capital gains without forcing them to rush into buying a property that might not be right for them.
- Investors can cash out on the equity of a highly appreciated property and put that amount towards an income-producing property without taking on the stresses and hassles too often associated with managing a property.
- One other important benefit of a DST is that you can buy a fractional ownership interest that can be easily divided among heirs. In contrast, it can be difficult to split up a property amongst multiple heirs and can potentially cause disputes within the family.
- If suitable for your specific situation, a DST can be an important addition to your portfolio, whether you’re a seasoned real estate investor or new to investing in real estate. You will have many properties to choose from and can find one that best suits your investment strategy.
- One potential drawback of DSTs is overall liquidity, meaning you may not be in full control of when the assets will be sold. If you need liquidity in less than 10 years, a DST might not be right for you. However, some investors want to keep their 1031 exchanges going until there is eventually a step up in basis.
Deferred Sales Trust
Those of us who own businesses, corporations, and commercial or residential investment real estate assets are often reluctant to sell because of capital gains taxes associated with the sale. But what other choice do we have other than a property exchange directed by a Qualified Intermediary? Is there another way to deal with the capital gains tax deficits that so many investors experience when they sell their real estate assets? The answer may lie in the Deferred Sales Trust™
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To be an accredited investor, an individual must have had earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years and “reasonably expects the same for the current year,” according to the SEC. Or, the individual must have a net worth of more than $1 million, either alone or together with a spouse. With the passage of the Dodd-Frank Act, this now excludes a primary residence as being eligible as part of an investor’s net worth (investors who had existing accredited investments but who now fail the net-worth test without their residence being valued were grandfathered).
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Investment Adviser Representatives offering investment advice and advisory services through O'Donnell Financial Group, LLC, are registered investment advisers. Securities and additional advisory services are offered through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. O’Donnell Financial Group, LLC and IFG are unaffiliated entities.