In a 1031 exchange, it is important to identify all potential replacement properties. A common question in these exchanges is how to identify Delaware Statutory Trusts (DST) as they are not an entity type typically found on property appraisal reports or identified by investors. Delaware statutory trusts are complex legal structures subject to many different laws. It is important to take precautions when identifying these types of trusts during a tax-deferred exchange. Here are ways to identify DSTs in your 1031 Exchange.
1. Look at the Legal Description
Trusts are typically identified on a property’s legal description by the phrase, “The Declaration of Trust of,” followed by the name of the trust. In some cases, two trusts will be listed with “and assigns” in between their names. DSTs are often created for holding real estate and may house multiple properties within one trust.
2. Review the Trust Agreement
Another way to identify DSTs is by reading the trust agreement. The trust agreement should be included in the legal description section but may, on occasion, appear somewhere else in the document under a different name or section number. Look for the names of any trustees if you are unsure that what you are looking at is a Delaware statutory trust.
3. Check the IRS Website
The IRS website provides a searchable database of all DSTs. This is a great resource if you are unsure about a particular property’s legal description or trust agreement. Enter the name of the DST properties for sale into the search bar and hit “enter” to be directed to the page.
4. Verify with a Delaware Trust Expert
Be sure to check all possible ways a replacement property can identify as a DST before committing to it as a 1031 exchange. Remember, if you do not report the correct property as your replacement property, you may be subject to penalties.
If you are still unsure, consult with a real estate attorney or another expert who can help identify DSTs through their legal descriptions, trust agreements and research the IRS website for confirmation.
5. Reviewing Replacement Property
For additional peace of mind, one can always look through their replacement property to address any questions they may have. This way, you will be sure to pick the most likely candidate(s) instead of relying on the guesswork that comes with online searches and legal descriptions.
6. Trustee Meetings
A trustee meeting is a great opportunity to ask questions about the trust and clarify any points you may be unsure of. This event is typically open to the public so that anyone can attend. Trustee meetings are also a good place to get updates on the trust’s holdings and the general health of the trust.
7. Trustee and Officer Roster
A trustee and officer roster lists all people who serve in an official position for Delaware statutory trusts or hold official roles in the trust. These lists are usually available on company websites, if they exist at all. This is another resource you can use to identify a DST if you are unsure about the name of the trust, or the trustees involved.
8. DST Attorney
An attorney who specializes in Delaware statutory trusts can be a valuable asset when identifying these types of trusts. They will have experience with the legal language involved in these trusts and can advise you on any aspects of the trust that may be unclear.
The laws surrounding DSTs are complex, so it is important to have help from an attorney if this issue poses a problem during your 1031 exchange.
9. DST Broker
Some firms offer the service of identifying DSTs for free or for a fee. These brokers are generally more trustworthy than online resources because they have access to information that you may not be able to find with an automated search.
Be sure to interview potential brokers and ask them how their firm identifies trusts before committing any funds. If their process is not transparent, you may want to look for another broker.
In conclusion, there are many different ways to identify Delaware statutory trusts. The most reliable way to do so is by reviewing the trust agreement, checking the IRS website, and verifying with a Delaware trust expert.
If you have any questions or concerns about replacement property, trustee meetings, or trustee and officer rosters, be sure to speak with an attorney or other expert before proceeding with your 1031 exchange.