As many seasoned investors approach retirement, they become less interested in dealing with the down sides of duplex investment; mainly tenants, trash and toilets.
The problem with long term real estate investment is when you no longer wish to be a landlord, the IRS believes you should compensate them for your exit strategy – through capital gains tax and depreciation recapture.
Of course, there is a way out through a 1031 or Starker Exchange. But what, if like so many others, real estate is such a great investment and you have so many properties that you can’t find a property with no to little management to exchange your money into?
Enter tenants in common (TIC) investment, which we detailed last week, and Delaware Statuatory Trusts (DST).
A DST are derived from Delaware Statutory law as a separate legal entity which is created as a trust, that qualifies for a 1031 exchange. A real estate sponsor firm simply buys a large property under the DST umbrella and opens up the trust to potential investors, who may purchase an interest.
Because up to 100 investors or more may be pooling their money, the assets in a DST are usually large institutional properties that most investors could not afford on their own. For example, a DST property may be a 500 unit apartment complex, a large shopping mall, or a large, prestigious office building in a desirable location.
There are a couple of advantages to investing in a DST, rather than in a Tenants in Common property. First, because DST’s may have more than 35 investors, the size and quality of the property may not only be greater, but the cost per investor may be considerably lower as well.
Lenders prefer DST’s as well. With a TIC, each investor gets their own loan for their share of the property. In a DST, however, there is one loan, which gives lenders greater security.
Of course, with any type of investment, you should be sure to do your due dilligence on not only the financial performance of the property, but also the sponsor of the DST.
As always, be sure to talk with your tax advisor before you sell a duplex, triplex or fourplex so you know the potential tax ramifications; if any.