Delaware Statutory Trust
The Delaware Statutory Trust (DST) structure has emerged over the last few years to become the preferred ownership structure for the fractional ownership of real estate. It is a separate legal entity formed as a trust under Delaware statute, which allows for flexible structuring of the entity. In 2004 the IRS issued Revenue Ruling 2004-86, approving the use of a DST for fractional ownership of real estate in which 1031 Exchanges are involved, provided that certain requirements are met.
A DST is structured so that each beneficiary (investor) owns a beneficial interest in the trust. The managing trustee of the DST is either the sponsor or an affiliate of the sponsors. The DST holds title to 100 percent of the fee interest in the property.
The beneficiaries’ only right within the trust is to receive potential distributions. They have no vote in the operation of the property. This, coupled with the trustee restrictions mentioned above, requires the use of either a master lease arrangement or a long-term triple-net lease to a credit tenant in order to operate the property within the confines of the applicable tax restrictions. (expand)
A DST may provide the following investor benefits:
As with any real estate investment, there are various risks including, but not limited to: loss of principal, variations in occupancy which may negatively impact cash flow, illiquidity and limits on management control of the property. Refer to the offering memorandum for additional risks before an offer to buy such security is made.
Tenant-in-Common is a form of holding title to real property. It allows the investor to own an undivided fractional interest in the entire property. It has been one of the preferred investment vehicles for real property investors who wish to defer capital gains via a §1031 exchange and own real property without the headaches of management. Today, however, the DST structure discussed above is the most commonly used in the industry.
A common choice among real estate investors seeking replacement property for their IRC Section 1031 tax deferred exchange is Tenant-in-Common Ownership (TIC), also known as fractional interest ownership. Under this co-ownership structure, you will own an undivided fractional interest in an entire property and share in your portion of the net income, tax shelters and growth. Further, you will receive a separate deed and title insurance for your percentage interest in the property and have the same rights as a single owner. Because TIC opportunities are often “packaged” with management and financing in place, TICs offer efficiencies in the identification, acquisition, financing, closing and operating stages of real estate ownership. (expand)
Furthermore, TIC ownership provides you with the ability to diversify your §1031 Tax Deferred Exchange into more than one property and to participate in potentially larger institutional quality properties. Thus, small investors in one area of the country may participate in large industrial, commercial and residential property investments all around the country with professional management in place.
TIC investments provide simplicity by eliminating active property management headaches. Individuals who are tired of the day-to-day burdens of being a landlord or who own land and would like an income producing property will appreciate the benefits of a TIC investment.
Features and benefits of TIC investments include:
Please contact us at any time at (866) 557-1031 for more information on TIC investment properties.
TICs are not suitable for all investors and the offering memorandum must be read carefully to assess the potential risks and rewards of each investment. As with any real estate investment, there are various risks including but not limited to: loss of principal, variations in occupancy which may negatively impact cash flow, illiquidity, and limits on management control of the property.
A 1031 exchange is a transaction in which a taxpayer is allowed to sell one property and buy another without recognizing, but instead deferring taxable income on the sale. This can be done through a simultaneous or delayed 1031 exchange. The transaction is aptly named after the federal tax law allowing it Section 1031 of the Internal Revenue Code. It is one of the best strategies for the deferral of capital gains and depreciation recapture tax that would ordinarily arise from the sale of highly appreciated real estate.
A successful exchange results in the taxpayer being able to utilize 100 percent of the proceeds from the sale of property to purchase a new property, thereby deferring capital gains and recapture tax on the relinquished property. (expand)
Real estate owners may accomplish several objectives by using a 1031 exchange, including greater leverage, diversification by asset class and geographic location, improved cash flow, and/or property consolidation.
How Does a 1031 Exchange Work?
A 1031 exchange is usually a three-way delayed exchange, referred to as a “Starker Exchange,” in which an intermediary is used to facilitate the transactions. There are four basic steps to the process:
In a 1031 transaction, these steps can also occur simultaneously. Preferably, before you sell your property, you need to consider what type of replacement property will work best for you, and whether or not you want to own a whole or partial interest in a property. Increasingly, investors are choosing to purchase a beneficial interest in a DST.
This information is provided and intended to be used for general education and informational purposes and is not intended as a solicitation to buy or sell securities.