For many investors, buying replacement properties for 1031 exchanges as Delaware Statutory Trusts (DST) is a popular choice.
It may be advantageous to exchange into a 1031 Exchange DST in a number of ways. As a 1031 investor, carefully consider the potential advantages and dangers before making an investment. Visit delaware statutory trusts news for more information.
Contact the experts at Corcapa 1031 Advisors for more details and knowledgeable advice about 1031 Exchange DST investments.
Potential Advantages of Delaware Statutory Trusts
1. Diversification
When choosing various DST properties for their 1031 exchange, investors can diversify their asset classes, cities, and amount of required non-recourse debt.
2. Reduced Minimum Investments
DSTs have reduced equity requirements, frequently as little as $100,000. Let your Corcapa 1031 Exchange agent know if you need to invest less than the minimum amount specified; in some cases, we may be able to negotiate a lesser amount.
3. There are no individual LLC annual filings.
DST investments may have cheaper fees than TIC investments do. It is not necessary for the DST investment to maintain and pay for a special purpose LLC entity on an annual basis.
4. Possibility of Higher Cash Flow
Investors typically choose DSTs because they could potentially receive more cash flow than they do now. Based on expected rental income less expected expenses, the majority of DSTs have forecast cash flows ranging from 4.00% to 5.50%.
For instance, if you put $1,000,000 of equity into a DST with a projected cash flow of 4.5%, you could expect to make $45,000 per year in net income. It’s possible that this represents a bigger net cash flow than what you now get from your rental property. The rental income and expenses could increase or drop unforeseen, as is the case with all real estate, so the income cannot be guaranteed.
5. Loans without Recourse
The majority of the loans included in the DSTs that DAI Securities, LLC has approved are non-recourse, which means the investor is not directly responsible for them.
6. Accessing Finance
Investors who require finance for their replacement property may have easier access to financing, and closings could go more quickly.
7. Access to a larger property
Access to properties of Institutional Grade, which are often larger commercial assets and traditionally required a sizable down payment.
Potential Risks of Delaware Statutory Trusts
1. No Guarantee
DSTs are also subject to market and general real estate risks. There can be no guarantee that a property will perform as anticipated, and DSTs are vulnerable to market fluctuations, tenants who don’t pay their rent on time, and other standard hazards associated with buying, selling, and managing real estate.
2. Investors Do Not Hold Title
DST investors do not have title to the trust; instead, they own beneficial interests in the trust, and the sponsor is in charge of the property’s management and sale. Owners of DSTs are dependent on the sponsor and have little control over their investment.
3. Illiquidity
There is currently no active secondary market on which to sell your DST interest, making it an illiquid investment.
4. Additional Charges
Each offering’s fees and costs should be carefully considered. The costs of multiple owner offerings are often higher than those of owning real estate alone; these costs should be compared to any potential capital gains tax liabilities. All investors are advised to seek tax and legal advice on taxes, including any potential federal and state capital gains taxes, depreciation recapture, and the recently enacted 3.8% Medicare levy.
5. Tax Status
DSTs for Tax Status are organised in accordance with Revenue Ruling 2004-86. It is usual for Corcapa and DAI Securities, LLC to work with sponsors and properties that have “should” level tax opinions for 1031 exchange tax compliance, but it is possible that the IRS might not view a DST offering favourably, which could result in back and immediate tax liabilities.
6. Loss of Property Value Risk
Every real estate investment carries the risk of declining in value over time.
7. Possibility of foreclosure
Each and every financed real estate investment carries the risk of foreclosure.
Conclusion
Like any real estate investment, cash flow distributions may be suspended if a building unpredictably loses tenants or suffers significant damage.