A Delaware Statutory Trust (DST) is an undivided fractional interest ownership in a trust. 1031 Exchange DSTs have low minimum investment amounts and therefore create an ability to diversify your current rental property into multiple investments in different cities, states, and asset classes such as apartments and net lease retail.
Below are common questions asked about Delaware Statutory Trusts, qualification requirements and the time frame for completing a 1031 Exchange DST.
What is a DST?
A DST is an acronym for a Delaware Statutory Trust which is fractional ownership, a separate legal entity created as a trust under the laws of Delaware in which each owner has a beneficial interest in the DST for federal income tax purposes and is treated as owning an undivided fractional interest in the property” In 2004 the IRS issued a Revenue Ruling clarifying the terms on structuring a DST investment for 1031 purposes. Please review the IRS Revenue Ruling 2004-86.
What is Corcapa? What is DAI Securities, LLC?
Corcapa 1031 Advisors is a Finra www.finra.org registered branch office located in Costa Mesa, CA. Securities offered through DAI Securities, LLC, member FINRA/SIPC.
What is the difference between Corcapa and a sponsor?
Corcapa 1031 Advisors is the California Branch Office of DAI Securities, LLC and is currently registered to do business in 40 states. We broker your DST transaction but are not the sponsor.
The Sponsor is the real estate firm that has sourced and structured the DST investment and will serve as the property manager (if not outsourced) and the asset manager. The sponsor will send the quarterly reporting, host conference calls about property performance and send year-end tax information.
How do I know If I am accredited and eligible to purchase a DST?
An accredited investor is an individual, or Revocable Living Trust, with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.
Entities such as Corporations and LLCs require a $5,000,000 minimum net worth or you can do a “pass-thru” test to qualify if all the individual members of the entity are accredited with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.
Irrevocable Living Trusts must have at least $5,000,000 gross net worth.
Will a DST or TIC Qualify for a 1031 Exchange?
The Revenue Ruling 2004-86 issued by the IRS governs how the DST should be structured so that the real estate program is likely to fit within the guidelines of a 1031 exchange. TICs have a Revenue Procedure 2002-22 that discusses the 15 structure points TIC programs should have in order to receive a “should level” tax opinion. Corcapa works with sponsors of DST and TIC offerings who structure the offerings with a legal opinion from experienced industry attorneys for 1031 exchange purchases. We recommend that you discuss this with your tax and legal advisors and we will provide all documentation to these advisors to use in analyzing your replacement property options. Learn more about 1031 Exchange DST Benefits and Risks and view current 1031 DST Property Listings.
What are the deadline dates to complete a successful 1031 Exchange?
To accomplish a full tax deferral on the sale of rental property you must follow the IRS Section 1031 Guidelines. Corcapa 1031 Advisors recommends the following:
- Be in communication with your Corcapa 1031 Advisor representative well ahead of your proposed relinquished property closing so we can begin to research and identify potential replacement property.
- Be sure to select and assign a Qualified Intermediary “QI” or Accommodator to receive the sale proceeds from escrow. Corcapa can recommend QIs for you. Be sure to research the financial backing of QIs before selecting them. Be especially careful to NOT take personal receipt of the funds or your exchange will be invalidated.
- From the day you close your relinquished property, you will have 45 days to identify your replacement property(ies) and can use one of three rules: The three property ID rule, the 200% rule, or the 95% rule.
- You have an additional 135 days from the end of the 45 day period in which to close on your replacement property(ies).
- Additionally, for full tax deferral you must purchase equal or greater purchase price, equal or greater debt and reinvest all cash.
How quickly can I close escrow on my DST?
This depends on the velocity of the real estate market. Currently there is a significant upswing in 1031 exchange activity and also an upswing in the purchase of DST properties. More attractive DST offerings can sell out quickly so its important to alert you Corcapa representative early on and let them know you have a pending 1031 exchange. This way we can be very proactive in finding the replacement properties that fit you needs.
Most clients prefer to have a closing on their replacement properties sooner so as to begin earning income. Its possible to have a closing on your DST within three to ten business days. Alternatively, clients may prefer to wait a few weeks to close escrow on their replacement property and this can easily be arranged.
One advantage of closing escrow sooner on your DST purchase is that the cash flow begins to accumulate immediately after closing and is paid with the first distribution the following month.
Must all my DSTs be purchased and close at the same time?
No. Historically most exchanges were simultaneous but now the most common form is now a delayed or deferred exchange. A delayed or deferred exchange means you sell your property and the net proceeds go to the accomodator, and then you have 45 days in which to identify replacement property(ies) and then another 135 days to close (for a total of 180 days).
What is Cash on Cash Return?
Cash on cash return is the projected cash flow of the property. For example, an equity investment of $500,000 in a DST property that has a 5% projected cash on cash return, then you can anticipate receiving a projected annual cash flow of $25,000 or $2,083 per month direct deposited into the bank account of your choice. A projected cash flow of a 1031 property is not a certain or guaranteed payment and payment is not assured.
How long is the typical hold period for a DST investment?
Most DSTs have ten years fixed rate financing associated with them. The sponsor will be mindful of this and generally does all they can to watch the market for the best time to sell and sell the property before year ten. However, no guarantee can be made as to when the property will sell.
Historically, the sponsors of DSTs that we work with have an approximately six-year holding period.
And some of the DSTs have sold within two to four years if they were in strong, growing markets.
However, given the current elevated pricing for quality properties around the country, I anticipate that many DSTs will go a full eight to ten-year hold period.
Are you an Accommodator?
While Corcapa is happy to refer you to accommodators, we cannot provide accommodator/Qualified Intermediary services. We specialize in the replacement properties for our clients’ 1031 exchanges.
* All information provided on this page is time sensitive and subject to change
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