{"id":27271,"date":"2021-04-01T09:33:30","date_gmt":"2021-04-01T13:33:30","guid":{"rendered":"https:\/\/www.affiliated1031.com\/the-abcs-of-dsts-and-1031-exchanges\/"},"modified":"2023-01-14T13:32:12","modified_gmt":"2023-01-14T18:32:12","slug":"the-abcs-of-dsts-and-1031-exchanges","status":"publish","type":"post","link":"https:\/\/www.affiliated1031.com\/es\/the-abcs-of-dsts-and-1031-exchanges\/","title":{"rendered":"The ABCs of DSTs and 1031 Exchanges &#8211; Part 1"},"content":{"rendered":"<div  class=\"tatsu-h6usrf9yvo7tv4a1 tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"15px 0px 15px 0px\"}' data-padding-top='15px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-h6usrf9yxxatttmy\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-h6usrf9yzdruo8l\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-S1-_Quxos  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-S1-_Quxos.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style>\n<p><em>Updated January 13, 2023<\/em><\/p>\n<\/div><\/div><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-h6usrf9z0o63hrrr  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-h6usrf9z0o63hrrr.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style>\n<h2><span style=\"font-size: 14px; color: #666666;\"><a title=\"Link to IRS definition of 1031 Exchange\" href=\"https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/like-kind-exchanges-real-estate-tax-tips\" target=\"_blank\" rel=\"noopener noreferrer\">Section 1031 Tax-Deferred Exchanges<\/a> have given investors a lot of reasons to continue to place their resources into investment real estate.<\/span><\/h2>\n<p>Exchange transactions provide\u00a0leverage to potentially increase the taxpayers&#8217; return on their capital investment along with the tax advantages of depreciation and deferring capital gains taxes through<\/p>\n<p>But what happens when the investor is tired of dealing with the 3 Ts\u2014tenants, toilets, and trash?<\/p>\n<p>If they are tired of the time-consuming management headaches related to their real estate investment, they can either purchase a NNN\u00a0 (triple-net) piece of real estate property, or they can acquire a fractional interest in a DST, Delaware\u00a0 Statutory Trust.<\/p>\n<p>Both of these options allow the taxpayer to <a title=\"link to article on liberty1031.com\" href=\"https:\/\/liberty1031.com\/what-is-a-1031-exchange\/understanding-1031-exchanges\/\" target=\"_blank\" rel=\"noopener noreferrer\">defer paying their taxes<\/a> and leverage the use of their equity, with the goal of having little or no management headaches.<\/p>\n<p>Parts One and Part Two of this missive will discuss some of the advantages and disadvantages of\u00a0 Delaware Statutory Trusts (DSTs).<\/p>\n<p><strong>SO THEN, WHAT IS A DELAWARE STATUTORY TRUST (DST)?\u00a0 <\/strong><\/p>\n<p>A DST\u00a0 is a type of real estate investment that provides the taxpayer with a fractional ownership interest in commercial investment properties that can be significantly larger than what the taxpayer would have been able to obtain on their own.<\/p>\n<p>Examples of these passive professionally managed investments are Industrial Buildings, Multi-Family Apartment Complexes, Health Care Facilities, Medical Offices, Office Buildings, Hotels, Self-Storage Facilities, and other types of commercial real estate.<\/p>\n<p>What the investor obtains is a fractional interest in the DST property.<\/p>\n<p><strong>WHAT ARE THE RISKS ASSOCIATED WITH DSTs?<\/strong><\/p>\n<p>As a generalization, DSTs have many of the same risks as owning real estate just by oneself. BUT because of how a DST is structured, there are additional risks that probably do not exist when directly owning a property.<\/p>\n<p>Some\u00a0 of these risks are:<\/p>\n<ul>\n<li>REGULATIONS:\u00a0\u00a0 There are various regulatory restrictions from IRS in order to take advantage of Section 1031 exchanges.\u00a0 Remember that our tax laws always seem to be fiercely debated and often \u201cchanged\u201d by Congress.\u00a0 There are also Security and Exchange Commission (SEC) regulations that need to be complied with.<\/li>\n<\/ul>\n<ul>\n<li>EXECUTION OF DOCUMENTATION:\u00a0 DSTs involve a number of different people with different goals, which also must comply with following our changing laws. So, the putting together of a DST package is a pretty complex process. \u00a0Just one mistake by the sponsor (the party that has put the\u00a0 DST package together) or their legal or financial counselor, or the Qualified Intermediary (QI), could result in the Section 1031 Tax-Deferred\u00a0 Exchange becoming non-qualified for Section 1031 purposes.<\/li>\n<\/ul>\n<ul>\n<li>HEALTH OF THE ECONOMY: The health of the economy in the\u00a0 United\u00a0 States can play a major role in how the DST performs economically.\u00a0 What happens when the interest rates rise or for that matter, what if there is an economic disaster, for example, Covid-19 or a Mortgage\u00a0 Foreclosure Crisis like the United States had in 2008-2012, etc.?<\/li>\n<\/ul>\n<ul>\n<li>TYPE OF ASSET RISKS:\u00a0 Certain types of investment real estate can be subject to different economic risks and pressures;\u00a0 for Example:<\/li>\n<\/ul>\n<ol>\n<li>OFFICE BUILDINGS:\u00a0 There are increased vacancies during economic downturns and pandemics.<\/li>\n<li>HOTELS:\u00a0 Location, Location, Location\u2014what happens if the major highway has been moved or traffic flows are changed?\u00a0 In many cases, the income streams are seasonal. What if the hotels obtain most of their income from business conferences and there is a\u00a0 governmental lockdown.? Obviously, the Covid-19 Pandemic has not helped that industry.<\/li>\n<li>MANUFACTURING:\u00a0 What if the needs for the product produced have been reduced?\u00a0 What if the necessary supplies to make the product become unavailable?<\/li>\n<li>MULTI-FAMILY HOUSING:\u00a0 What if the tenants can\u2019t pay due to their jobs being lost (i.e., Pandemic) or the job market has changed, or a factory that supports the area has closed down?<\/li>\n<\/ol>\n<p><strong>WHAT FEES AND COSTS ARE INVOLVED?\u00a0 <\/strong><\/p>\n<p>There are a number of fees that can be charged at three different levels; upfront fees, operating fees, and resale fees.\u00a0 The following are some of those fees and costs:<\/p>\n<ul>\n<li><strong>SALES COMMISSIONS:<\/strong>\u00a0 Usually, DSTs are sold by independent third-party selling companies. They, of course, get paid a commission when a DST investment is sold.<\/li>\n<li><strong>BROKER-DEALERS:<\/strong>\u00a0\u00a0 The Managing Broker-Dealer gets a fee for managing the property, but in many cases, also gets reimbursed for their costs related to their due diligence and marketing efforts.\u00a0 Because DSTs are classified as securities, DSTs are offered to the public through legal entities known as \u201cmanaging broker-dealers.\u201d\u00a0 These broker-dealers generally assist in document preparation, SEC compliance, and due diligence and, as a result, are compensated for this work.<\/li>\n<li><strong>WHOLESALING:<\/strong>\u00a0 Most Sponsors (the company that puts the entire DST product together) have their own selling teams, also known as wholesalers.\u00a0\u00a0 The wholesalers work with other registered representatives (salespeople), furnishing them with the information and documentation necessary to make the sale.\u00a0\u00a0 Most of these wholesalers are assigned a geographical area to be responsible for, and they, too, will receive a commission for the transactions that occur within the geographical area that they are responsible for.<\/li>\n<li><strong>ACQUISITION FEES (A\/K\/A \u201cFINDERS FEES\u201d):\u00a0<\/strong> These fees are made to the Sponsor for negotiating, identifying, and procuring the asset for the DST.\u00a0 Sometimes the Sponsor also gets paid for helping to secure the financing for the acquisition.<\/li>\n<li><strong>OTHER COSTS:\u00a0<\/strong> There are items called \u201cfront load\u201d costs.\u00a0 These are funds needed for reserve accounts and other capital costs.\u00a0 Front Load costs are an important item to be aware of because when you are trying to re-sell your undivided interest in the DST, you will need to recover those additional costs, as well as the sponsor\u2019s asset management fees and fees related to the final sale of the DST Property.<\/li>\n<\/ul>\n<p><strong>WHAT HAPPENS ON THE RE-SALE OF THE DST INTEREST?\u00a0 <\/strong><\/p>\n<p>That is one of the most important questions.\u00a0 What happens when someone wants to resell or, for that matter, is forced to re-sell due to needs, death, divorce, etc.?<\/p>\n<p>Some Sponsors will try to help the investor find a purchaser for the investor&#8217;s fractional interest.\u00a0 Some \u201cProfessionals\u201d\u00a0 believe that Sponsors have no incentive to resell an individual fractional interest because when there is a resale of the entire DST property, the Sponsor then has a large group of investors who are ready, willing, and able to get into another DST, which of course, means a new set of commissions, etc.<\/p>\n<p>We will cover in Part two of this DST\u00a0 missive how to re-sell the DST fractional interest and the Pros and Cons of DST ownership\u2014look for it !!<\/p>\n<p><strong>AFFILIATED<\/strong><strong>\u00a01031,<\/strong>\u00a0<strong>LLC<\/strong> always recommends that the taxpayer should consult their tax and\/or legal counsel on all matters dealing with the Internal Revenue Service.<\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<\/div><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-h6usrf9yzdruo8l.tatsu-column{width: 100%;}.tatsu-h6usrf9yzdruo8l.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-h6usrf9yzdruo8l > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-h6usrf9yzdruo8l > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6usrf9yzdruo8l > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-h6usrf9yzdruo8l > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-h6usrf9yvo7tv4a1 .tatsu-section-pad{padding: 15px 0px 15px 0px;}.tatsu-h6usrf9yvo7tv4a1 > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6usrf9yvo7tv4a1 > .tatsu-top-divider{z-index: 9999;}.tatsu-h6usrf9yvo7tv4a1 .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Parts One and Part Two of this missive will discuss some of the advantages and disadvantages of\u00a0 Delaware Statutory Trusts (DSTs).<\/p>\n<div><a href=\"https:\/\/www.affiliated1031.com\/es\/the-abcs-of-dsts-and-1031-exchanges\/\" class=\"exp-read-more exp-read-more-underlined\">Read More<\/a><\/div>\n","protected":false},"author":1,"featured_media":26964,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","footnotes":""},"categories":[57],"tags":[58,59,60,61],"class_list":["post-27271","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1031-exchange-basics-es","tag-1031-exchange-es","tag-liberty-1031-es","tag-section-1031-exchange-es","tag-tax-deferral-es"],"_links":{"self":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27271","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/comments?post=27271"}],"version-history":[{"count":4,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27271\/revisions"}],"predecessor-version":[{"id":27402,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27271\/revisions\/27402"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media\/26964"}],"wp:attachment":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media?parent=27271"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/categories?post=27271"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/tags?post=27271"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}