Delaware statutory trusts -- structures through which
investors can do like-kind exchanges to shield gains on
investment property sales from tax -- are rising in
That is good news for property investors who are retired,
approaching retirement and others who like to use DSTs, as they
DSTs' rising usage reflects the recovery in real estate
"The more that property rises in value, the more likely
investors are to sell," said Brandon Balkman, vice president of
marketing of OMNI Real Estate Services, which gathers data about
1031 exchanges, another name for like-kind exchanges. And when
they sell at a profit, many want to roll those gains into another
property rather than pay tax on the gain. DSTs help them do
A primary use of a DST is to conduct a like-kind exchange. A
like-kind exchange lets an investor avoid liability for capital
gains on the sale of investment property.
The participant in the exchange invests in another investment
property that costs at least as much as his proceeds from the
sale of the first property. His principal residence does not
The investor must identify replacement properties within 45
days of selling the first property. And he must invest in the
replacement property within 180 days of selling the first
Proceeds from the first sale must be held by a neutral
intermediary until their reinvestment.
All Together Now
Like-kind exchanges can be done by individuals. A DST lets a
number of investors band together to own investment real estate,
which any one of them might not be able to afford individually,
usually to do a like-kind exchange.
DSTs are rising in popularity as a replacement for
tenant-in-common groups, another type of like-kind,
The key drawback to TICs, as they're known, is that lenders
have to deal with all the participants.
"In contrast, a DST is a single entity controlled by a
sponsor, so lenders know who they're talking and dealing with,"
said DST-specialist attorney Amy Giannamore of the law firm DLA
A sponsor is the person or group that organizes the DST.
A drawback to a DST is investor loss of direct control of a
The IRS first let DSTs be used in like-kind exchanges in 2004.
The 2008-09 downturn made financing scarce, pushing investors to
find a structure that lenders were comfortable with, Balkman
In 2013, investors used 40 DSTs and only five TICs, Balkman
says. In 2006, 341 TICs represented $3.7 billion in deals.
Regional broker-dealers such as Centaurus Financial and Berthel
Fisher offer DST deals, says Louis Rogers, CEO of Capital Square
Retirees use DSTs to swap an investment property in a
cold-weather location for another in their warmer retirement
locale, or to rid themselves of a property that requires hands-on
management that they no longer wish to perform.
DSTs often charge upfront loads as high as nearly 10%, Rogers
says. Yearly costs tend to be 1% for commercial properties and up
to 4% for multifamily ones.
A key appeal of a DST is that commercial properties typically
sign tenants to seven- to 10-year leases. Going into a deal,
investors know what their monthly income will be.
"Getting that stated return 99% of the time is very attractive
in a period of low interest rates," Rogers said.