In the past 12 months, billions of US real estate investment dollars have flowed into DSTs (Delaware Statutory Trusts) through the 1031 exchange process.
What is summer time? A Delaware Statutory Trust is a legal entity incorporated under Delaware law that enables investors to hold undivided interests in professionally managed institutional grade real estate offerings in the United States. The interests can belong to individuals or specific companies. Summer times are only offered to accredited investors and companies and are available to them.
The type of real estate in a summer time is typically Class A apartment buildings, medical buildings, hospitals, Amazon distribution centers, prefabricated homes, senior and student housing, distribution facilities, warehouse portfolios, in some cases Walgreens and Walmart stores, and industrial buildings. Many 1031 Exchange DST investors find themselves at a point in life where they are ready to forego the day-to-day problems of owning real estate and are looking for a more passive way to earn monthly tax-privileged real estate income.
The IRS recognized summer times as “replacement property” for 1031 exchange purposes. Therefore, purchasing a stake in a DST is treated as a direct investment / interest in real estate that meets the requirements of the IRS Revenue Ruling 2004-86. The origin of the 1031 exchange dates back to the 1920s, making it a longstanding and stable aspect of tax law.
In many cases, summer times can also be an attractive investment vehicle for unlisted investors looking for diversification and exposure to institutional quality real estate. Instead of using a 1031 exchange, these investors invest cash, funds that are also accepted for investment according to the minimum requirements of each company.
A Delaware Statutory Trust may, due to the nature of the mutual fund, offer investors highly tax-privileged treatment in terms of monthly dividends. With this type of trust, real estate is bought for the trust and the income is distributed to the investors through the performance of the sponsors, which can be assessed in the offer of the private placement memorandum. The trust is not considered to be taxable and therefore all gains, losses, etc. are passed on directly to investors. Investors participate in depreciation in the same way as an investor who owns a 100% interest in their own property.
The 10 main reasons people choose daylight saving time to replace their 1031 exchanges:
1) Potentially better overall returns and cash flows
Many real estate investors may not be earning the cash flows they see fit. An investor looking to determine their cash flows can take their net rental income from their Appendix E, add up the depreciation, and then subtract the bulk of their payment. Next, divide that number into the property market value. For example, if you had $ 50,000 in net rental income and $ 10,000 in depreciation and a principal payment of $ 10,000, the net number would be $ 50,000. If the property is valued at $ 1 million, the investor would have cash flow of 5%. Summer times could potentially offer a better cash flow and risk-return profile while offering an investor a passive alternative.
2) Tax planning and received topping up of the base
Summertime offers the same tax benefits of real estate that an investor would own and manage. The depreciations are passed on to the DST investors through their proportional share. In the future, daylight saving times can be exchanged for another daylight saving time via a 1031 exchange. The holding times for summer times are on average between five and seven years. Contact your tax advisor for more information and specific tax advice as you evaluate daylight saving time as an option on your 1031 exchange.
Many DST holdings have multiple assets within a DST structure. For example, an investor could swap a residential home for a portfolio of 10-15 Walmart stores and / or Walgreens and other triple net leases with a single tenant within a DST structure.
4) You no longer need to manage properties
Sometimes we hear from a client who is aging and no longer has the health, time, or desire to manage their own real estate investments. Summer times can provide a great passive option while preserving the desire to invest in real estate.
Passive investing allows senior home owners the time and freedom to travel, pursue other business ventures, spend more time with family, and / or move to a location remote from their current property assets.
6) As a backup strategy
In a highly competitive real estate market, an investor may not be able to find a suitable replacement property for their 1031 exchange. Daylight Saving Times is a great option and should be named / identified in an exchange, if only for that reason. Once a property investor has sold a property, they have 45 days to identify a replacement and 180 days to close it or the tax-free exchange will be denied by the IRS.
7) Capture equity in a hot market
When the markets are at all-time highs, investors may want to take their profits off the table and invest again by taking advantage of the leverage of a DST offering.
8) Protect the family
A family can be at risk if only one spouse knows how to manage real estate investment assets. With passive summer times, management is effectively outsourced, which can protect a family when a spouse is no longer able to take care of their own interests.
9) Avoid ongoing repairs to actively managed property by becoming passive
Real estate investors know that one day they may have to replace expensive roofs and AC units, do foundation repairs, face potential litigation and other surprise costs associated with investing in real estate. Summer times can protect investors from such surprise costs.
10) Main part of age and estate planning
Summertime offers many options for age, tax, and estate planning. Passive income, elimination of personal liability, freedom, ability to manage cash flows, and wealth transfer are just a few of the opportunities DSTs can offer investors and their retirement planners.
For more information on old-age provision with summer times, please visit www.Provident1031.com.
This article is written by our contributing advisor and presents the views of our contributing advisor, not the Kiplinger editorial team. You can review advisor records with the SEC or FINRA.
Chief Investment Strategist, Provident Wealth Advisors
Daniel Goodwin is the chief investment strategist and founder of Provident Wealth Advisors, Goodwin Financial Group and Provident1031.com, a division of Provident Wealth. Daniel holds a Series 65 securities license and a Texas Insurance license. Daniel is a representative of the investment advisor and a trustee for the companies’ clients. Daniel has served families and small business owners in his community for over 25 years.