Many baby boomers and seniors who hold long-time owned, highly appreciated real estate assets may be at a stage of their lives when they are seeking more passive investment opportunities. Passive, professionally managed ownership may allow them to concentrate on other opportunities in life that they may have always been passionate about but never had the time to thoroughly enjoy.
Passive Investment Benefits
Rather than deal with the "Terrible T’s" consisting of toilets, trash and tenants, many older investors are in search of the "Terrific T’s" which give them time, travel and teeing off. To accomplish these goals, some seasoned investors have turned to real estate investment strategies such as a Tenants In Common 1031 Exchange.
Tenants in Common 1031 Exchanges have long permitted investors to own a piece of high caliber, professionally managed property and / or assets occupied by established, national tenants, and with virtually zero property management responsibilities. Most of these investors have been able to accomplish these forms of ownership in a tax-deferred manner through a 1031 Exchange.
Delaware Statutory Trusts Are Becoming Popular
Now, a more innovative, lesser recognized strategy has gained serious interest. This concept is known as a Delaware Statutory Trust or DST. Though DSTs were not created yesterday, current tax laws have made Delaware Statutory Trusts a preferred investment vehicle for passive 1031 Exchange investors and direct (non-1031) investors alike.
DSTs are derived from Delaware Statutory law as a separate legal entity, created as a trust, which qualifies under Section 1031 as a tax-deferred exchange. In 2004, the IRS blessed Delaware Statutory Trusts with an official Revenue Ruling about how to structure a DST that will qualify as replacement property for 1031 Exchanges. The Revenue Ruling (Rev. Ruling 2004-86) permits the Delaware Statutory Trust to own 100% of the fee-simple interest in the underlying real estate and may allow up to 100 investors (sometimes more) to participate as beneficial owners of the property.
How a Delaware Statutory Trust Works
The real estate sponsor firm, which also serves as the master tenant, simply acquires the property under the DST umbrella and opens up the trust for potential investors to purchase a beneficial interest. These investors may either deposit their 1031 Exchange proceeds into the Delaware Statutory Trust or the investor may purchase an interest in the DST directly.
Delaware Statutory Trust investors may benefit from a professionally managed, potentially institutional quality property. The underlying property could be a 500-unit apartment building, a 100,000 square-foot medical office property or a shopping center leased to investment-grade tenants. The possibilities are endless.
