There is a number of ways to hold title to real property. Perhaps the most common way is to hold full title – or “fee” simple title – as an individual or married couple. Title to real property can also be held jointly by multiple corporate or individual persons. One increasingly common means to jointly hold title to an investment property is to use a so-called Delaware Statutory Trust. DSTs are trusts which have been established under the state laws of Delaware and which permit multiple investors to co-own a property and still maintain the ability to freely sell their ownership interest. In a DST ownership arrangement, investors acquire an “undivided fractional interest” in the real property and they are able to dispose of this interest without obtaining the prior approval or cooperation from the other investors. In other words, DST interests are freely alienable, and for this and several other reasons DSTs have become used more and more frequently in tax deferred real estate exchanges under IRC Section 1031.
Benefits of DSTs
Delaware statutory trusts offer several significant benefits over other co-ownership arrangements. For one, DSTs are able to accommodate large numbers of investors – much larger than TIC arrangements – and so DSTs provide a reasonable avenue for investors to acquire interests in highly expensive developments. Investors can achieve a level of diversification with DSTs which would ordinarily be unattainable; with DSTs, investors can obtain reasonably priced fractional interests in properties which would normally be outside their list of prospects.
Investors who prefer passive investments may also gravitate to DSTs. Typically, DSTs are managed by a central sponsor, and so investors usually take on very few (if any) managerial responsibilities when they acquire an interest in a DST.
Because of their structure, DSTs are likely to be an excellent option for veteran investors who want steady, reliable returns from investment property with relatively low risk; they will be less ideal for newer investors, or for investors who are looking to grow their wealth at a rapid pace.
Obtaining an interest in a DST is a bit tougher than doing the same with another investment vehicle; DSTs have barriers to entry, and so investors who acquire DSTs typically hold these interests longer than they hold interests in other investments. This means that investors should think carefully about whether investing in a DST be a good decision for them, because DSTs generally demand greater levels of commitment from investors.
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