Delaware Statutory Trusts: 3 Reasons They're Here to Stay Kiplinger Kiplinger is supported by its audience. When you purchase through links on our site, we may earn an affiliate commission. Here's why you can trust us.

3 Reasons Delaware Statutory Trusts Are Here to Stay

Changing demographics, effects of the pandemic and economics will likely ensure the longevity of 1031 exchanges and DSTs. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Dwight Kay published 27 October 2022 It doesn't seem that long ago when the winds surrounding the commercial real estate industry were rustling with whispers of President Biden's plans of repealing the current 1031 exchange laws and quashing alternative like-kind exchange vehicles such as Delaware Statutory Trusts. However, when Congress passed the Inflation Reduction Act (opens in new tab)with no proposed changes to section 1031 of the Internal Revenue Code (IRC), three powerful forces amplified the reality that the 1031 exchange and DSTs will likely be here to stay.

What Is a DST 1031 Exchange Investment

A Delaware Statutory Trust is a real estate ownership structure for 1031 exchanges that allows multiple investors to each hold an undivided beneficial interest in the trust. The term "beneficial interest" means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate.

Top 10 Reasons Real Estate Investors Are Jumping into DSTs The laws of DSTs allow the trust to hold title to one or more investment properties that can include commercial, multifamily, net lease, retail, office, industrial, self-storage, etc. Investors are keenly interested in DSTs because the IRS blessed them to qualify as "like-kind" investment property for the purposes of a 1031 exchange.

Subscribe to Kiplinger s Personal Finance

Be a smarter, better informed investor. Save up to 74%

Sign up for Kiplinger s Free E-Newsletters

Profit and prosper with the best of Kiplinger's expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger's expert advice - straight to your e-mail. Sign up The appeal for 1031 exchange strategies such as DSTs has never been stronger. According to a midyear 2022 market update report from the real estate research firm Mountain Dell (opens in new tab), in 2021 securitized 1031 exchange programs, which includes DSTs, raised a record $7.4 billion - doubling the previous record of $3.7 billion set in 2006. According to the same report, the DST marketplace is poised to continue to grow. What's driving the popularity of 1031 exchanges and like-kind investment strategies as DSTs? We believe there are three major forces that are driving the popularity of DSTs for 1031 exchanges now and into the near future and that these same forces will hopefully make it unlikely that Congress will pull the rug out from under the current exchange laws.

Demographics Baby Boomers Are Retiring from Landlord Responsibilities

One of the most fundamental forces helping protect the 1031 exchange market is demographics. According to expert researcher and data analyst Jonathan Jones of Construction Coverage, Baby Boomers hold more real estate wealth than any other generation in history. Born 1946 through 1964, Baby Boomers have an influence on all things real estate that cannot be overstated.

How a DST Solved One Landlord's Million-Dollar Problem For example, according to Jones' Construction Coverage report (opens in new tab), Americans over the age of 55 own 53.8% of all the real estate in the United States, including trillions of dollars of highly appreciated investment real estate. Now many of these aging Baby Boomers (the oldest are turning 76 this year) are rapidly relinquishing their investment properties via 1031 exchanges. In addition, they are looking for alternative real estate investment options that offer both tax-deferral and other life-enhancing benefits. More and more, this group is employing DSTs for their 1031 exchanges to defer capital gains taxes and enter a passive investment structure.

Pandemic COVID-19 Fallout Affected Rental Property Owners

Another powerful force that helped ignite the popularity of the 1031 exchanges was COVID-19 and its impact on rental property owners. Because our firm actively works with thousands of commercial property owners across the country, we've heard firsthand some of the challenges and pressures property owners have faced during the pandemic (and continue to face). These include mandated eviction moratoriums, strict rent-control laws and other regulations that directly affect the financial health of investment real estate. Now, many of these same investors are stepping away from the financial burdens brought about by COVID-19 and the headaches associated with "tenants, toilets and trash." Investors by the thousands are relinquishing their rental real estate and reinvesting the proceeds into other real estate opportunities, like 1031 exchange DSTs. Without the ability to defer capital gains and other taxes through the 1031 exchange rules, many of these "mom-and-pop" independent investors would be subject to tax bills that could amount to 40% of the gains these investors realized after decades of working hard to build a modest real estate portfolio. William Brown, past president of the National Association of Realtors (opens in new tab), summed it up nicely in a recent New York Times article (opens in new tab) when he said, "Getting rid of the 1031 exchange would hamper the opportunity of investors because most investors cannot afford to sell a property and then buy something else after paying taxes."

Economics 1031 Exchanges Help Support Other Industries

Finally, there is something inherently virtuous in the IRC 1031. That is, like-kind exchanges help propel commerce through a number of other industries, like banking, construction, landscaping and insurance. A well-known study (opens in new tab) written by Professors David C. Ling of the University of Florida and Milena Petrova of Syracuse University analyzed how 1031 exchanges encourage useful economic activity and growth that also supports the local commercial real estate markets and local tax bases. According to the study, DST 1031 exchanges also achieve the following three major economic benefits:Like-kind exchanges are associated with increased capital investment in and reduced loan-to-value ratios (in other words, reduced debt) on replacement properties.Tax-deferred exchanges improve the marketability of highly illiquid commercial real estate. (This increased liquidity is especially important to the many non-institutional investors in relatively inexpensive properties that comprise the majority of the market for real estate like-kind exchanges.)1031 exchanges increase the ability of investors to redeploy capital to other uses and/or geographic areas, upgrading and expanding the productivity of buildings and facilities that in turn generates income and job-creating spending. By repurposing capital and real estate in a compressed time frame, 1031 exchanges and DSTs help the economic growth of cities and states across the country, making the like-kind law a relevant and important ingredient to the preservation of wealth and the continued strengthening of the U.S. economy.

Passive Real Estate Investing with a Delaware Statutory Trust (DST) There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. All offerings discussed are Regulation D, Rule 506c offerings. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential distributions, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals, and risk tolerances. Securities offered through FNEX Capital, member FINRA, SIPC. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab). Explore More Building Wealth Dwight KayFounder and CEO, Kay Properties and Investments, LLC Dwight Kay is the Founder and CEO of Kay Properties and Investments LLC. Kay Properties is a national 1031 exchange investment firm. The www.kpi1031.com (opens in new tab) platform provides access to the marketplace of 1031 exchange properties, custom 1031 exchange properties only available to Kay clients, independent advice on sponsor companies, full due diligence and vetting on each 1031 exchange offering (typically 20-40 offerings) and a 1031 secondary market. Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 You might also like 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 Finding Peace of Mind With Your Retirement Income Even in tough times, you can secure retirement income that lets you maintain your lifestyle, lasts a lifetime, adjusts for life events and leaves a legacy for the kids. By Jerry Golden, Investment Adviser Representative • Published 10 November 22 What to Do When an Unhappy Customer Threatens to Ruin Your Rep Some customers go too far when they feel they haven't been treated well, demanding unreasonable make-goods and even resorting to extortion. An attorney offers some advice. By H. Dennis Beaver, Esq. • Published 10 November 22 Rising Interest Rates Change the Math on Pensions for Some Would-Be Retirees Now is a good time to think about when and if to take a lump sum on your pension and what to do with it. Let's explore the pros and cons. By Michael Aloi, CFP® • Published 9 November 22 Counterattack: Tips for Thwarting a Will Contest From contentious relatives to scam artists, wills are not immune to the threat of a contest. If you have an inkling such a fight could be in your estate's future, here are some ways to limit the risk. By Linda Kotis, Esq. • Last updated 10 November 22 5 Steps to a Stronger Financial Plan It's impossible to be right all the time, but a strong plan and constantly assessing where you are can help you pivot when bad things inevitably happen. By Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser • Published 8 November 22 Safe Harbor 401(k)s Can Help Small-Business Owners Keep Happy Employees Immediate vesting and contributions by the employer regardless of the employee's participation pump up workers. Employers get lower costs and tax benefits. By Mike Piershale, ChFC • Published 8 November 22 5 Survival Tips for the Bear Market It's been a painful year for investors, but focusing on the long term and implementing constructive actions can help weather the turbulence. By Daniel Kern, CFA®, CFP® • Last updated 8 November 22 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
© Future US, Inc. Full 7th Floor, 130 West 42nd Street, New York, NY 10036.