In this informative episode of The Attorney Post, Ross Rubin and Peter May, two seasoned professionals in real estate investment and wealth planning, delve into the strategic world of Delaware Statutory Trusts (DSTs), 1031 exchanges, and the broader landscape of real estate-based tax planning. Their discussion highlights crucial insights for accredited investors, estate planners, and advisors navigating the complexities of high-value property holdings and generational wealth preservation.
Ross Rubin, who entered the DST market in the early 2000s after a personal loss, provides a historical overview of how the market evolved. With DSTs gaining traction after the 2008 financial crisis, the market has since grown significantly—now expected to exceed $7 billion in transaction volume. Meanwhile, Peter May brings a legal and financial planning background, combining law school training with hands-on experience in tax and insurance strategy, making for a dynamic and well-rounded conversation.
At the heart of the discussion is the four-quadrant planning strategy, which includes tax return management, cash flow optimization, investment positioning, and estate preservation. This framework allows clients to develop a balanced financial plan tailored to their long-term goals. Both guests underscore the importance of working with professionals who can provide guidance across all four quadrants to ensure asset longevity and compliance.
A key point raised is the unique investment profile of DSTs. While offering tax-deferral benefits, these investments require relinquishing control to a sponsor, which some clients may find challenging. Rubin and May advise that investors should carefully vet DST sponsors and be aware of asset allocation impacts—particularly when a significant portion of one’s portfolio is tied to a single DST.
The duo also discuss tax implications and real estate valuation strategies. Examples include properties that have appreciated significantly over time, creating both opportunities and potential tax liabilities. They point out that investors often overlook the power of passive activity carryforwards and depreciation recapture, both of which can affect the net taxable amount.
Another critical element is the 45-day identification window in 1031 exchanges, a tight timeline that can complicate transactions if a chosen property falls through. DSTs serve as a solution for many investors under deadline pressure, offering pre-packaged, vetted properties that satisfy IRS requirements.
Environmental, geographic, and political factors also influence DST selection. For instance, investors from lower-tax states may hesitate to invest in DSTs based in high-tax states like California. Meanwhile, others may avoid certain Florida investments due to concerns over rising sea levels and climate risk. Still, Rubin and May emphasize that well-performing DSTs in industrial, multifamily, or medical office sectors may still be worthwhile, regardless of location.
The conversation contrasts DSTs with Real Estate Investment Trusts (REITs). While REITs typically invest across broader sectors, DSTs are more targeted, often excluding volatile asset classes like office buildings. DSTs also differ structurally, being illiquid and having a predetermined hold period, typically 4–7 years. Investors must understand that some DSTs may transition into 721 UPREITs, eliminating the ability to perform future 1031 exchanges with those funds.
Rubin and May walk through real-world client outcomes, including those involving co-owned physician practices, where exit strategies are complicated by death, disagreements, or changing partnership goals. DSTs often offer a more flexible solution, especially in situations where fractional ownership must be addressed posthumously.
Both speakers underscore the importance of due diligence, particularly around the financial health of DST sponsors. Since DSTs cannot raise additional capital after initial funding, poor management or planning can negatively impact the investment. Additionally, the illiquid nature of DSTs means investors should only enter if they do not expect to access funds short term.
A notable highlight is the discussion around "legislative grace"—strategies legally provided by the tax code that offer significant benefits when properly leveraged. May urges clients to assess the opportunity cost of holding underperforming real estate versus moving to a diversified DST portfolio. Rubin adds that DSTs often have minimum investment thresholds as low as $100,000, allowing proceeds from a single property sale to be diversified across several investments.
As Rubin and May continue to educate investors and professionals through platforms like DSTSherpa.com and continuing education events, their mission is clear: help clients navigate the complexities of DSTs and 1031 exchanges with clarity, compliance, and strategic foresight.
Online at: DST Sherpa
