Income property owners wait and wait for real estate prices to improve prior to selling. Ultimately, they end up paying more because property prices refuse to fall and the capital gains tax becomes payable. What property owners do not know is that it’s possible to defer capital gains tax. Real estate owners can use a Delaware Statutory Trust in a Section 1031 syndication program. The Delaware Statutory Trust (DST) is a new form of legal entity that was created under the Delaware law. Since 2000, investors and practitioners have increasingly used this form for tax deferral and asset protection. DSTs are slowly but surely replacing tenant-in-common structures for real estate investment and it is not hard to understand why. In this article, we will discuss more about Delaware trust advantages.
Freedom of contract
A Delaware Statutory Trust provides parties contractual freedom regarding the terms of governing, which means that it is up to the parties to define their business relationships. The express guideline of the DST Act is to provide maximum freedom of contract and to implement trust agreements. The parties have the opportunity to create relationships that best suit their business needs and to govern all aspects of their connection. Freedom of contract also offers trustees liability protection that resembles that of a limited liability company or partnership. Therefore, the modern solicitude towards freedom of contract is combined with the traditions of trust law.
Commercial real estate properties structured as Delaware Statutory Trusts are not subject to capital gains tax. Investors can sell their capital assets for a price that is higher than the purchasing price and not pay capital gains tax. What happens is that the investor purchases interests in the trust that holds title to the property. Simply put, the Section 1031 of the Internal Code Revenue exchange takes place through the DST. Owing to the Delaware Statutory trust, it is possible to swap an investment property for another by deferring the tax consequence of the sale. The trust is structured in such a way that is not likely to be subject to tax at business organizational level.
Low minimum investment
DST sponsors usually allow the minimum investment to be lower than with a tenant-in-common structure. There is no restriction when it comes to the number of investors. A Delaware Statutory Trust allows for up to 499 investors, so the investment amount is smaller. The minimum investment amount is what mostly attracts people. Generally, the minimum investment is $25,000 to $50,000. As a result, large real estate properties can be acquired without spending too much. Investors can multiply their exchange proceeds among many properties.
To conclude, a Delaware Statutory Trust offers many advantages. The form can be used for tax deferral, there is a low minimum investment, and parties enjoy freedom of contract. It is not though suitable for any kind of undertaking. A DST is appropriate for passive investments, but it is not a good option for enterprises where everyone wants an active role in management.