Top 6 Frequently Asked Questions (FAQs) for Delaware Statutory Trusts (DSTs)
Carl E. Sera, CMT
December 10, 2020
If you have read our article on Delaware Statutory Trusts and still have questions, the purpose of this article is to provide answers to any question you may have regarding investing in a DST. We will focus on the most frequently asked questions we have received from our clients in the past. However, we invite you to reach out for a complimentary consultation with us.
Let’s get started with the FAQs
1. What Is An Accredited Investor?
To qualify as an accredited investor, you must have earned a net income of $200,000 or exceeded $300,000 (as a couple) for the past two years with a reasonable expectation of equal or greater income in the present year. You may also qualify as an accredited investor if you have a net worth of $1,000,000 (in all assets except your primary residence).
2. How Long Does One Typically Hold A DST?
On average, investments in a DST are typically held for 4-10 years depending on the initial requirement by the sponsor and the real estate market. Before investing in a Delaware Statutory Trust, you should be aware that a DST is a long-term investment due to its illiquid nature (difficulty in exiting the DST).
3. What Type Of Replacement Properties Do DSTs Invest In?
While the chosen properties a DST decides to invest in are at the discretion of the DST sponsor, DSTs sponsors are usually national institutional sponsors with a range of available properties—diversified by types, geographical location, and value. This makes it a great option when doing a 1031 exchange. Investing in a DST allows you to choose from a list of replacement properties and avoid boot due to its low minimum investment amount.
4. What Are The Risks of Investing In A DST?
While a DST is considered a low-risk investment, it still carries several risks just like any other real estate investment. Some of the risks include; lack of control, the possibility of poor management, seven deadly sins, and liquidity risk. To mitigate the potential risk associated with investing in a DST, you should consider working with a credible and experienced exchange company and a registered investment advisor like Sera Capital that is a fiduciary.
5. What Happens When A DST Is Sold?
Once the DST is sold, you will receive your share of the sale proceeds from the DST in line with your initial investment and any additional appreciation. At the point, it is at your discretion to either:
a). do a 1031 exchange into another DST(s) or real property,
b). pay taxes on the realized gains,
c). or some combination of the two.
6. What Happens To My DST Investments If I Die?
If an investor dies before the DST liquidates or is sold, the heir from the investor’s estate will inherit their assets in the DST on a stepped-up basis. What this means that the replacement property will be valued based on the fair market value at the time of the investors’ death. Also, even upon the death of the investor, their heirs or beneficiaries will continue to receive the yield until the DST is sold.
Once the DST is sold, the heirs have the liberty of using their share of the sale proceeds for a 1031 exchange or cash out. This is why the Delaware Statutory Trust is a great tool for estate planning if you are planning to defer the payment of capital gain taxes on appreciated assets.
If you are tired of the stress of landlord duties or looking to diversify your real estate portfolio, then DSTs may be a great real estate investment option for you. Be sure to reach out to us if you have several personal questions regarding DST investments.