Historically, a statutory trust is created so that a property can be held by multiple parties, for rental purposes or sale, at their discretion. All income from the property prior to its sale, and all proceeds of its sale, are then held in trust for the beneficiaries.

In 1988, the state of Delaware enacted the Delaware Statutory Trust Act. The act was groundbreaking in that it designates and allows for legal trust relationships through which property ownership can be divided. Although other jurisdictions have similar statutes, Delaware has become the premier setting of choice for the creation of a statutory trust.

Because Delaware’s Act is flexible in regards to the operation, management, and activities of the trust, DSTs can be used for a diverse range of investments and business transactions. The trust is a distinct legal body that is recognized by the IRS for federal tax purposes, it owns the title to the property and makes all decisions related to its income and sale. Each investor has a “beneficial interest” in the DST for federal tax purposes, and can be used under IRS rulings to “acquire real estate where the beneficial interests in the trust will be treated as direct interests in replacement property for purposes of IRC 1031.”

Though investors have no title to the property, they share a proportionate interest in the trust, and therefore are entitled to distributions from rental income or property sale. The trust itself is not a taxable entitle, though. In addition, investors have no responsibility for handling the daily management of the property. DST property management is handled by a designated professional investment asset manager and/or property manager.

DSTs provide investors an avenue for tax deferral and asset protection, by owning a “direct interest in real estate.” DST ownership offers the same benefits and risk as a single large-scale investment property, but without the pressures and time consumption of day-to-day property management.

 

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