Peregrine Private Capital Corporation
For years, real estate investors have successfully used section 1030 of the IRS Code to exchange their property for bigger and better “like kind” property and defer payment of capital gains tax on their sale of property. Traditionally, investors have used the “three property rule” for identification and exchange purposes. However, there is another solution which provides investment property owners with even greater flexibility from a property identification standpoint and much more potential diversification.
A Delaware Statutory Trust (DST) is simply a separate legal entity crated to hold title to one or more income producing commercial properties. This can be any type of commercial property; apartments, retail space or even an office building. The income stream is passive. All properties are managed by the DST sponsor. This investor is no longer responsible for day to day management. Cash distribution from property operation inside the trust are made monthly to the investors. Just like other rental income, the investor’s income is sheltered from taxes by depreciation and interest expense.
A DST offers the following benefits including:
Low minimum investment: Typically a minimum of $100,000 for 1031 exchangers and $25,000 for cash investors.
Remote management: Responsibility for management is placed into the hands of a trustee.
Cash distribution potential: The rental income is distributed on a monthly basis directly to your bank account. You aren’t responsible for collecting rents.
Diversification: Instead of having all your money tied up in one property, DST’s allow you to diversify like a REIT. Owning multiple properties in different geographic areas can protect your investment from a downturn in one sector of the economy by offsetting an uptick in another.
Low cost of ownership: DST investors are not required to maintain any type of special purpose LLC to hold their real estate like a TIC program.
Non-recourse loans: DST investors are not required to execute loan guarantees or indemnities. This investor risk is limited to the invested equity.
Liability protection: The DST “wrapper” shields the exchanger or investor from any liabilities with respect to the property.
Property management is a full time job. The unending round of responsibilities makes it difficult for some owners to travel or just relax and enjoy other important activities when tied to tenants and properties. Exchanging into a DST portfolio which holds multiple income producing property makes good sense for real estate owners who no longer want to shoulder the burden of active management. Someone else can change the light bulbs and collect the rent.