Building Wealth and Enjoying Passive Income.

• Author: Harvey, John
• Position: BUSINESS & FINANCE - Delaware Statutory Trust

THE DREAM of building wealth and enjoying financial independence is alive and well, as legislation has allowed real estate effectively to synthesize with protective securities regulation and beneficial tax law to produce a new investment concept known as the Delaware Statutory Trust, or simply DST.

DST is a trust formed under Delaware statutory law that essentially provides for a fractionalized real estate investment, and presents the opportunity, through a securities private placement offering, for an individual to join with other accredited investors to own investment-grade real estate that none of them could own individually.

A DST interest provides the investor with an undivided fractional ownership in the entire property or properties, including the projected cash flow, potential appreciation, and tax-deductible depreciation. Furthermore, the purchase and sale of a DST interest may qualify for capital gain nonrecognifion under Section 1031 of the Internal Revenue Code.

The advantages of a DST property offering include a low minimum investment amount, access to institutional-grade properties, national credit tenants, stabilized monthly income, greater diversification, full disclosure offering materials, professional due diligence, limited liability protection, more-favorable financing terms, lower transaction and administrative costs, and tax-deferred capital gains. The DST vision is the cumulative realization of these numerous advantages.

While marketable securities have a place in every income and growth portfolio, the two major headwinds to building wealth using securities traditionally have been taxation and market volatility. However, nearly 100 years of legislative and judicial landmarks have integrated to bring together the DST concept.

Chronologically, these legislative and judicial landmarks are the: 1921 adoption of Section 1031 into the Internal Revenue Code to allow for nonrecognition of capital gain for real estate; 1933 Securities Act that provided for Regulation D private placement rules applicable to certain real estate offerings; 1946 landmark case of SEC v. W.J. Howey Company, in which the Supreme Court defined an investment contract; 1988 Delaware Statutory Trust Act that provided a multi-investor structure flexible enough to accommodate the requirements of IRC Section 1031; IRS Revenue Ruling 2004-86 holding that real estate held in a properly structured Delaware Statutory Trust qualifies for IRC Section 1031 exchange; and 2017 Tax Cuts and Jobs Act that preserved 1031 exchange for real...