Delaware Statutory Trusts (DSTs) have become increasingly popular investment vehicles for investors seeking passive income, appreciation potential, and tax benefits. As an alternative to 1031 exchanges, DSTs allow investors to own fractional interests in larger commercial properties. However, DST investments also come with illiquidity, lack of control, and inability to raise new capital. This article will analyze the returns, cash flow, tax advantages, and risks of dst investments to help readers understand if they align with their investment goals.
DSTs can provide stable cash flow but have higher minimums
DSTs generate cash flow from the rental income of the underlying commercial property. This passive income is distributed pro-rata to investors, often monthly. Minimum investments for DSTs often start around $100,000, allowing for diversification across multiple properties. However, compared to public REITs, DSTs require more upfront capital for entry.
Appreciation and depreciation can enhance returns long-term
In addition to cash flow, DST properties may appreciate over the 5-10 year typical holding period. Investors can also benefit from non-cash expenses like depreciation to shelter taxes. However, major capital expenses can diminish returns if reserves are inadequate.
DSTs have more flexibility than 1031 exchanges
DSTs allow investors more flexibility in reinvesting sales proceeds compared to a 1031 exchange which has strict reinvestment requirements. However, DSTs have longer lockup periods, with expected hold times of 5-10 years.
Lack of control and liquidity are the main downsides
The major disadvantages of DSTs are their illiquidity and lack of investor control. There is no public market to sell ownership interests, and investors cannot control property operations or decisions.
DSTs can be useful for tax deferral goals
The deferred sales trust structure allows investors to defer capital gains taxes on the sale of appreciated assets. By reinvesting in a DST, gains can be deferred indefinitely. This makes DSTs helpful for meeting tax deferral objectives.
In summary, Delaware Statutory Trusts can provide stable passive income, tax advantages, and diversified access to large commercial properties in exchange for less liquidity and control than other options. Evaluating the return profile and risks can help determine if DSTs align with an investor’s portfolio goals.