How Real Estate Investors Can Leverage A DST?

Most Real Estate Investors have heard of the 1031 Exchange.

Did you know there are 17 different tax minimization solutions for reducing, deferring, or completely eliminating the tax bill on the sale of a Primary Residence, Second Home, or Investment Property.

In this series of posts we will discuss the 17 Real Estate Tax Minimization Options available to you in five categories. The second category is the Delaware Statutory Trust with four options to choose from.

Category 2: Delaware Statutory Trust or DST

The Delaware Statutory Trust or DST is an exit strategy from a 1031 Exchange. In order to successfully complete a 1031 Exchange, the investor must sell their relinquished property and purchase a replacement property of equal or greater value.  

DSTs are pro rata ownership in securitized real estate that can be purchased by the Exchange Accommodator on your behalf with the funds in a 1031 Exchange. A DST can be just one or one of many properties identified in the 45 day identification period of a 1031 Exchange.

DSTs typically pay anywhere from a 3% to 5% return and can run 3, 5, 7, or 10 years long. They are not liquid investments and there is no resale market.

However, because they are considered real estate, they can be a powerful tool when combined with other real estate transactions.

For example, let’s say you have a replacement property identified in your 1031 Exchange but the replacement property is $25,000 less than your replacement price target. You can combine the real estate purchase and a DST to meet the equal or greater goal for your 1031 Exchange and pay no taxes.

There are also many varieties of DST properties. They can be multi-family, medical, consumer sites like Walgreens, commercial, build to rent residential, solar, senior living, student housing, oil & gas, triple net leases, and many more. Then can also be bundled into portfolios of multiple properties.

The right DST for you depends on your situation and your investment goals.

We will briefly discuss each DST Type separately below.

1.     Simple DST: A Simple Way To Earn Mailbox Money

A simple example, James sold his investment property for $1,000,000 but he had a loan for $500,000. After paying the loan in escrow, James now has $500,000 with a 1031 Exchange accommodator. James can either,

a)     Buy new investment property for $1,000,000 or more by using his $500,000 from the 1031 Exchange as a down payment and getting a new loan for the rest, or

b)     Buy $500,000 in one or more DSTs with a 50% loan to value (LTV).

The DST option does not require James to get a new loan because, when he made the investment into the DST(s), he made an equity investment of $500,000 and also bought $500,000 in debt based on James’ pro-rata ownership in the 50% LTV DST. Now James has investment income and depreciation from a professionally managed real estate investment without the hassles of managing real estate and no mortgage payments.

In addition, James keeps the remaining depreciation schedule on his relinquished property.

2.     DST + REIT: Lock In Mailbox Money Long Term with Higher Rates

Let’s use the same example with James selling his investment property for $1,000,000 and a $500k mortgage. The only difference between a regular DST and a DST + REIT option is that the DST +REIT option allows the investor to convert their DST investment into a REIT.

The conversion is not automatic. Typically the investor is provided the opportunity to convert about 2 to 3years into the DST investment. The REIT also typically offers higher income.

The main difference between a DST and REIT investment is that when exiting a DST, the investor can choose to do a1031 Exchange. A REIT does not allow a 1031 Exchange exit.

3.     Zero Coupon DST: No Income But High Leverage

Now let’s modify the use case a bit. Betty is selling an investment property for $750,000 and has a $300,000mortgage. She placed $450,000 into a 1031 Exchange with her accommodator. She wants to buy a condo in HI for $500,000 and use $400,000 in cash from her 1031Exchange and get a $100,000 mortgage.

The problem with this scenario is that Betty does not meet the terms of her 1031 Exchange. She needs to invest$450,000 and get a $300,000 mortgage. In the scenario above, she would need to pay tax on $250,000. $50k for the missed equity and $200,000 for getting too little mortgage.

Fortunately, she is working with the cleaver folks at DeferTax.com. They found Betty an 80% LTV DST that pays zero coupon. That means there is no income for this Zero Coupon DST, but for every $50k she invests, she gets $200k in mortgage.

This means that Betty can buy her condo in HI for $500,000 and use $400,000 in cash from her 1031 Exchange and get a $100,000 mortgage.

She can now buy a $50k Zero Coupon DST and pay no taxes. Why because her $50k equity investment bought $250k worth of real estate. $50,000 equity and $200k in debt.

Remember that all DSTs have zero recourse loans so the investor will never have to pay the debt, even though they “own it”.

4.     Special DST: DST with a Cash Out Option and Big Depreciation Upside

Now let’s take a look at another situation entirely. Bob and Jean own a $10,000,000 multi-family building and have no debt. They bought the building for $2,000,000 and depreciated it down to $1,000,000. They have $40k per year in depreciation.

Now they want to buy a 50,000square foot warehouse for $8,350,000 and rent it out to their trucking company@ 75 cents a square foot or $450,000 per year. They want a low to no mortgage and to reset their depreciation schedule on the new building.

If they do a 1031 Exchange, they will keep the original depreciation schedule of $40,000 per year. Since they can earn over $150,000 per year in depreciation on the new building, just doing a 1031 Exchange is a no go for them.

Now let’s take the same scenario using the Special DST. A Special DST can return up to 86% of the invested amount in cash 30 to 60days after making the DST investment.

A Special DST is a 20 year investment. It is zero coupon, but you get 86% of your cash back tax free with no restrictions since the original 1031 Exchange has been satisfied when the Special DST was purchased.

So how does this work?

Note: The Special DST has a $500,000minimum capital gain requirement.

Bob and Jean exit the 1031 Exchange by identifying and purchasing the Special DST for $10,000,000. 60 days later, they receive a check for $8,600,000 or 86% of their investment. They can do anything they want with this cash because the 1031 Exchange has been successfully completed.

They then notify their realtor that they have the cash to purchase the warehouse and buy it for $8,350,000. This leaves them with$250,000 in cash and they use some of it to buy a Cost Segregation Study that adds $45,000 per year of additional depreciation.

Now Bob and jean have a warehouse producing $450,000 of income and they have much more depreciation each year.

·        The original $40,000 of depreciation from the1031 Exchange

·        $150,000 of depreciation from the property purchase

·        $45,000 of accelerated depreciation from the Cost Segregation Study

This means they have $235,000 in tax write offs for depreciation against their $450,000 income stream before any additional business expenses are added in.

This is how a Special DST with a Cash Out Option provides a Big Depreciation Upside.

If you'd like to pay less in taxes, schedule a complimentary consultation with a Tax Strategist atDeferTax.com today! Call 877-829-7927 or book an appointment here…

Summary,

In the hands of an expert, the Delaware Statutory Trust or DST is a powerful tool to leverage when making real estate investment or exit decisions. These are complex strategies and should be explored with the help of an expert who places your best interests first.

These are complex strategies and should be explored with the help of an expert who places your best interests first. Let’s face it, if someone has one or two options, they are not a tax strategist. They are a salesman trying to sell you their product.

We have over 40 tax minimization options on our platform. We are nationwide educators and keynote speakers on Tax Minimization. We are also real estate investors, business owners, homeowners, and high income earners. We use the strategies we recommend!

Once you pick the right strategy that is right for you, we connect you with our network of vetted providers that are “best in class” in the industry. How do we know that? We use them ourselves. You can work with one of them or someone else. It is entirely up to you.

I hope you found this document informative. We have more detailed content and videos on this tax strategy at DeferTax University. Click here to learn more.

Our exploration of tax minimization will continue with Category 3, the Deferred Sales Trust in our next post.

Our website, StartAnExchange.com The easiest place on the internet to Start an Exchange, has more information and educational materials on the 1031 Exchange and more ways to save when exiting an exchange.

Our website, DeferTax.com, has more information and educational materials on over 40 tax minimization options for a primary residence, second home, investment property, business, stocks, crypto, and ordinary income tax reduction.

If you'd like to pay less in taxes, schedule a complimentary consultation with a Tax Strategist atDeferTax.com today! Call 877-829-7927 or book an appointment here…

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