A Delaware Statutory Trust (DST) has the potential to offer benefits to accredited investors. Purchasing a DST gives an investor the opportunity to add commercial real estate exposure to their portfolio without the hassles that come with direct property management. DSTs have the potential to generate monthly income, plus a capital gain when the underlying property(ies) are sold at the end of the holding period.

Investors purchase fractional shares of a DST, while the trust itself retains ownership of the underlying properties. This structure frees the investor from the responsibility of property management and limits personal liability related to the property holdings. However, it can also create some confusion when tax time rolls around. Following, you’ll find a brief explanation of DST taxation and tips for paying taxes on DST holdings. 

DST Taxation Explained

Income received from a DST is typically taxable as ordinary income and is reported on IRS Schedule E when the investor files their personal tax returns. To determine tax liability, investors need to review the documents that are provided by the DST sponsor each year. 

One can expect to receive both an operating statement and a 1099 tax form for each DST holdings every year. The operating statement provides details regarding the pro rata share of the income and expenses associated with the property held by the DST. The 1099 tax form shows all of the dividend and capital gains income received from the property investment during the tax year. 

It’s common for a DST to hold properties that are located in multiple states. If an investor owns a DST that holds property in a state that has state income taxes, they will likely have to file a state tax return even if they don’t live there. If the DST holds properties in multiple states, multiple state income tax returns may need to be filed. 

Once a DST goes into liquidation, an investor will have the opportunity to defer the capital gains taxes by engaging in a 1031 exchange. To do this, investors need to work with a qualified intermediary to reinvest the proceeds into a new DST or other qualified replacement property. Then, one will notify the IRS of the exchange by filing Tax Form 8824 with their tax return in the year the exchange takes place. 

Tips for Paying Taxes on DSTs

DST year-end statements can be confusing, and the potential necessity to file multiple tax returns adds another layer of complexity. For this reason, DST investors should consider consulting with a CPA or financial advisor who has experience working with real estate investors. In some cases, these experts may be able to find deductions or depreciation opportunities that could help reduce income tax burdens. It’s also possible that the savings may potentially offset the cost of their services. 

Waiting until the last minute to begin tax preparation could lead to problems. Whenever possible, one should plan ahead and begin tax preparation early. This way, investors will have extra time to deal with any issues that arise and ensure they are able to file taxes before the deadline. 

If you are interested in learning more about DSTs, download your complimentary copy of our e-book.