As a first-time investor in a Delaware Statutory Trust (DST), tax season can be an overwhelming and confusing time. In addition to your regular tax documents, you will need to be aware of what to expect from your DST's tax reporting. This article aims to provide you with information to help you prepare for the year-end tax season and understand the tax documents related to your DST investment.
The Impact of Entity Type on Tax Filing Requirements for DST Investors
As an investor in a Delaware Statutory Trust (DST), the type of entity in which you hold your beneficial interests can affect how and when you need to file your taxes. The deadline for your tax filing can differ depending on whether you are filing as a corporation or an individual/pass-through entity, and this is unrelated to your DST investment.
If you invest in a DST through an S-Corp or partnership, your tax filing deadline is March 15th, which is earlier than the standard April 15th deadline. On the other hand, if you invest in your name individually or via a pass-through entity like an LLC, the corporation deadlines do not apply to you. Your tax filing deadline is the individual tax return filing deadline of April 15th. This also applies if you are filing as an estate, trust, or C-Corp.
States and DSTs
Delaware Statutory Trusts (DSTs) may own one or more income-generating properties across multiple states, which can make tax filings complicated for investors. Filing requirements may differ based on the state in which the properties are located. States like Texas or Florida, for example, do not have a state income tax, while other states have de minimis filing standards that determine whether an investor needs to file in that state based on the amount of income earned.
Investing in a DST that owns properties in multiple states means that investors will need to file in each state that has an income tax. This can increase the cost of tax filings due to the need to file in multiple states, as well as the need to hire tax professionals to assist with the filing process. Each state has its own rules and regulations regarding tax filings, so it's important to consult with a tax professional to ensure compliance.
Despite the additional costs, DST tax filings are generally considered to be more straightforward and simple than tax filings for direct property ownership. This is especially true for properties with various types of personal property on them that have different depreciation schedules. When investing in a DST, it's important to consider the potential impact on tax filings and to plan accordingly to ensure compliance with state regulations.
Documents for Tax Filing
If you’re a first-time investor in a Delaware Statutory Trust (DST), tax season can be a confusing time. Unlike other investment types, DSTs don’t typically send out K-1s or 1099s. Instead, you’ll receive separate year-end statements for every DST you’re invested in.
Additionally, there isn’t a consistent statement used by all sponsors. Some sponsors may provide a grantor letter, while others may provide a modified 1099. In general, a pro-rata operating statement is sent out, which includes income and expenses for each property. This statement is sometimes referred to as a substitute 1099.
It’s essential to give any DST documents you receive to your tax professional to complete your tax return. If you don’t have a tax professional, some DST sponsors may provide a directory of CPAs that you can work with.
It’s also important to be aware that investing in a DST that owns income-generating properties in multiple states can complicate your tax filings. You may be required to file in every state that has an income tax, which can increase costs due to filing in multiple states. However, DST tax filings are typically more straightforward and simple than tax filings for direct property, especially if that direct property has any personal property on it with various depreciation schedules.
In summary, as a DST investor, you can expect to receive separate year-end statements for every DST you’re invested in. These statements will provide information on income and expenses for each property. Be sure to give any DST documents to your tax professional to complete your tax return, and be aware of any state tax filing requirements for your DST investments.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.
Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.
1031 Risk Disclosure:
- There’s no guarantee any strategy will be successful or achieve investment objectives;
- All real estate investments have the potential to lose value during the life of the investments;
- The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- All financed real estate investments have potential for foreclosure;
- These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits