For the past 20 years, the commercial real estate sector has enjoyed favor alongside investment options such as equities, bonds, and case. This preference is because commercial real estate investments have the potential to yield greater income and appreciation, as well as tax benefits and risk-managed returns. For all these benefits, commercial real estate investing has only one purported drawback: the average investor is almost always at a disadvantage, as commercial real estate is financially out-of-reach.
However, this isn’t true. In fact, average investors are able to reap the benefits of commercial real estate through Delaware Statutory Trusts.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust is a legal entity that is created when a number of investors agree to pool together an amount of money in order to acquire a real estate property. Each investor is then entitled to fractional interests and assets covered by the trust. A Delaware Statutory Trust is managed by a DST sponsor or trustee, who is in charge of identifying and acquiring the real estate assets. The trustee is also in charge of managing the property itself. The individual investors then continue to use their investment to displace the capital spent by the DST sponsor until the individual investors fully own the property. Each investor enjoys a percentage of ownership of the property. Therefore, no single investor may claim exclusive ownership over the assets acquired.
How Do I Earn Passively With a DST?
All that an investor needs to start earning passive income is to select a DST property and to acquire ownership over it (alongside other investors). The passive income begins to flow when the property is put in a 1031 exchange, wherein the property is exchanged for a like-kind property (which, in this case, is a commercial real estate property). Under normal circumstances, there are tax implications and time frames that need to be considered while performing a 1031 exchange.
However, when a 1031 exchange is performed with a DST property, its investors are exempted from the management-intensive responsibilities that come with owning a property. Moreso, whenever a property is sold, the sellers have to pay a capital gains tax at the time of the sale. This is not the case with the sale of a DST property, wherein the parties involved do not have to pay a capital gains tax at the time of sale.
This is important considering that you save a great deal on taxes, which you can then reinvest into buying a property with higher value or several other properties. The capital gains you earn from these subsequent transactions will eventually accumulate into a significant amount, without having to pay taxes.
Real estate investments are some of the best ways to earn passive income. However, as earlier stated, not everyone has the financial capacity to buy property, let alone commercial property. With a DST, even average investors have a chance to operate in the real estate market. As with any investment, it’s really a matter of understanding and managing risks. It’s also important to note that the capital gains tax in a DST property exchange is not exempted, but rather deferred, which means that it will eventually be demandable.
Image Source: https://cdn.pixabay.com/photo/2017/04/10/22/28/residence-2219972_1280.jpg
