How Delaware Statutory Trusts Works

Real Estate
When structuring a 1031 Exchange, investors often encounter problems in identifying the suitable replacement property within the required deadlines. In order for a 1031 Exchange to be valid, the replacement property must be identified within 45-days of the date of the relinquished property transfer. In addition, the replacement property must be purchased within 180 days of the relinquished property transfer.

In order to comply with the 45-day deadline, some investors may be forced to identify replacement property that does not meet their investment goals. While the tax benefits of a 1031 Exchange are appealing, that should not be the only factor considered when identifying replacement property. The economics of the deal must make sense as well.

What is a Delaware Statutory Trust?

Delaware Statutory TrustOne solution to the issues identified above is a Delaware Statutory Trust (DST), which is a Qualified Intermediary for a 1031 Exchange. A DST is a legally recognized trust that is set up for a business purpose but not necessarily in the state of Delaware. DSTs are structured and sold as securities, so they must be purchased through a securities representative. Investors in DSTs own a beneficial interest in the trust that gives them the opportunity to own shares of larger and potentially more stable, secure and profitable property then what could have been acquired individually by the investor. DSTs usually own institutional grade commercial properties such as shopping centers, office buildings and retail buildings.

Revenue Ruling 2004-86 Delaware Statutory Trust Issues Addressed

On August 16, 2004, the Treasury Department issued Revenue Ruling 2004-86, which established the requirements for investing in DSTs as part of a 1031 Exchange transaction. This Revenue Ruling addressed two issues:

ONE

The first was that the a DST will be classified as a trust for federal tax purposes.

TWO

The second allows a taxpayer to exchange real property for an interest in a DST without recognition of gain or loss under Section 1031 as long as the other requirements of Section 1031 are satisfied.

As with any investment transaction, there are advantages and disadvantages of DSTs that must be considered.

Questions about DSTs or 1031 exchange transactions? Please contact a member of the Real Estate Services Group or fill out the form below to schedule a consultation.

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