A Delaware Statutory Trust (DST) is a new-fangled creature. Years ago, LLCs were the new kids on the block and not every state had an LLC statute. DSTs are kind of like the newest kids on the block. Here is a primer on Delaware Statutory Trusts as they relate to 1031 exchanges.
The Basics of a Delaware Statutory Trust
A Delaware Statutory Trust is a method of owning property where at the top of the ownership pyramid there is a trustee that is the figurehead owner of the property. That trustee can enter into institutional financing with creditors, and can enter into leases with occupants of the property. But for tax purposes the beneficial owners of the trust, the investors that put their money into the purchase of the DST, are not deemed to be owners of a trust, but instead are deemed to be owners of the assets (typically real property) of the trust.
DSTs and 1031 Exchanges
For 1031 exchange purposes you can sell a traditional fee interest in title and acquire a beneficial interest in a Delaware Statutory Trust and that interest will be treated as interest in the underlying real estate and as like-kind to the fee simple title sold in the relinquished property.
Some of the benefits of a Delaware Statutory Trust are that they may be designed to provide a steady income stream for the investors, typically the debt on a DST is institutional and non-recourse financing. So if a taxpayer has to acquire a property with debt on it, to satisfy any requirements under the napkin test for debt relief, at least they are taking-on non-recourse debt instead of debt for which they are personally liable for.
- 1031 Hotline: If you have questions about Delaware Statutory Trusts, feel free to call me at 612-643-1031.
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