Using a Farmland Delaware Statutory Trust (DST) for a 1031 Exchange

October 19, 2023
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AcreTrader has partnered with DST Farmland and People's Company to offer a Delaware Statutory Trust (DST), Central Washington Farmland Trust. This is a farmland DST opportunity that can create potential tax benefits for eligible investors. Read this article to gain more information about the potential tax and investment benefits of DSTs.

Many investors choose to include real estate, including farmland, as an asset class in their portfolios because of the two-fold potential for returns: annual dividends from rental income and appreciation of the real estate asset across the hold period of the investment.

Investors may also add real estate to their portfolios because of the potential tax benefits that can come with these investments. While understanding those tax benefits may seem daunting, understanding how real estate can be used as a 1031 exchange could benefit your current portfolio as well as your long-term financial goals. Keep reading to learn more about whether a Delaware Statutory Trust could be an investment vehicle that's right for your portfolio.

What is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust (DST) is a 1031 exchange eligible investment vehicle and differs from an LLC or LLP. First, let's define a 1031 exchange. A 1031 exchange is the swap of one real estate investment for another similar real estate investment. Upon selling a property (for example, residential or commercial real estate, raw land, mineral rights, or farmland), an investor can potentially defer capital gains tax by reinvesting the proceeds into a like-kind investment (usually another real estate investment, such as an entire home, commercial real estate property, or piece of land). The name, 1031 exchange, is derived from Section 1031 of the Internal Revenue Code. This exchange allows investors to defer capital gains taxes while potentially diversifying their real estate holdings, thereby deferring the tax burden and using those funds instead for a larger capital base.

A DST is one type of investment vehicle that is 1031 exchange eligible. This structure allows investors to fractionally invest in a Delaware Statutory Trust that holds real estate by pooling their funds into a single- or multi-asset vehicle. Through DSTs, an investor can receive many of the potential benefits of wholly owning a real estate property without the work that comes with management. 1031 exchanges are governed by strict rules and timelines and, importantly, a tax advisor should be consulted before initiating an exchange.

Timing is an important factor in 1031 exchanges, and can be complex to navigate. Using a DST as an investment vehicle can help mitigate some of the timing challenges potentially created by purchasing an entire real estate property. For example, if an exchange of properties will not occur concurrently during a 1031 exchange, investors are required to employ a qualified intermediary to facilitate the exchange. The qualified intermediary holds the cash from the initial sale until the closing of the replacement property. The IRS requires this so the investor exchanging properties does not hold 1031 exchange funds in the period between property closings. Conducting a 1031 exchange through a DST can allow for timely identification and closing in order to facilitate the 1031 exchange.

A DST is managed by a professional firm, oftentimes referred to as the ”Sponsor”, who can help alleviate some of the complicated timing issues purchasing an entire property can create and manage the property for investors. The Sponsor operates DST-funded properties in accordance with IRS requirements, including negotiating lease agreements, managing tax compliance, and seeing to fiduciary responsibilities. This can make it easier for investors to take part in a real estate property without managing the property themselves.

Why invest in farmland through a DST?

Farmland is an alternative asset that investors and advisors alike turn to in order to diversify and hedge portfolios against inflation. Farmland has historically shown stability and consistent returns as relatively limited downside in bad years.

The opportunity to invest in farmland investment offerings as a DST through AcreTrader is a unique one. In addition to receiving the tax benefits of a DST, fractional ownership allows investors to take part in larger offerings with lower capital investments. By pooling funds, a DST can create an opportunity that might be beyond the reach of individual investors. Diversification is also a benefit of fractional investment, equipping investors to engage with multiple properties. Additionally, when considering estate planning benefits, DSTs can facilitate flexible distribution of assets to beneficiaries.

While the Central Washington Farmland Trust opportunity is available as a DST for 1031 exchange eligible investors, investors may instead choose to invest in this property with non-1031 eligible cash. This initial investment would then potentially be eligible for a 1031 exchange upon exiting the DST, thus deferring capital gains from the DST investment.

AcreTrader's due diligence process is conducted on all of our investment opportunities in order to thoroughly vet the underlying assets. Additionally, DST Farmland performs initial due diligence on all DST offerings to include site visits, infrastructure assessments, crop production history, and water rights research when applicable. AcreTrader and DST Farmland can also refer investors to qualified intermediaries who can assist in the transition of funds as a part of the 1031 exchange.

What to expect when investing in a DST through AcreTrader

From Sale to Re-investment

In partnership with DST Farmland, AcreTrader can refer investors to qualified intermediaries to facilitate investment in the amount of time required by the IRS. This ultimately makes the investment timeline easier for investors in regards to both the 45 day rule and the 180 day rule, the two timing rules important to completing a 1031 exchange. Note that Investors are purchasing shares in an entity that will purchase this farm but are not purchasing actual acreage of the farm directly.

The 45 day rule states that from the time of sale of the initial property, the owner has 45 days to designate the property that they will purchase as a replacement. This designation, also commonly called “identification”, must be made in writing to the purchaser's qualified intermediary. The 180 day rule states that the purchaser must close on the replacement property within 180 of the sale of the initial property. It is important to note that the 45 day rule timeline is concurrent with the 180 day rule. This means the entire exchange from sale closing to purchase closing must be completed within a total of 180 days.

Property Management

Each DST has a Sponsor who is strictly regulated by the internal revenue code. The Sponsor is required by the IRS to manage the Master Tenant, signatory trustee, asset manager, and the beneficiaries of the trust. AcreTrader partners with DST Farmland, an affiliate of Peoples Company for our farmland DST offerings. DST Farmland serves as the Sponsor of the offering while engaging Peoples Company expertise in sourcing, diligence, and farm management. AcreTrader, DST Farmland Peoples Company are not affiliated companies. AcreTrader does not provide tax advice, consult with your own tax professional.

Receiving Distributions

Investors in AcreTrader DST offerings receive annual distributions from lease income through a Master Lease provided by the Master Tenant. The Master Tenant is responsible for all costs of operating, managing, leasing, and maintaining the properties during the term of the lease.

One benefit of farmland is that occupancy risk is typically low. In addition to the income generated by the farm lease, investors would also receive the eventual proceeds from the sale of the property, including potential appreciation. Distributions are subject to change and are not guaranteed in frequency or amount.

How does fee structure work for a DST? Typical fee structures for AcreTrader farmland DSTs differ from traditional AcreTrader offerings or other commercial real estate DSTs. Farmland DSTs include syndication expenses such as real estate fees, capital reserves, selling commissions/expenses, and organization and offering expenses. While fees for most real estate DSTs range between ~10-18% of capital raised for the property, AcreTrader and DST farmland offering fees sit at ~8% of capital raised. It's worth noting that DST offering costs incurred by the Sponsor, DST Farmland, are significantly higher than those of a standard AcreTrader platform offering. This is because outside of sourcing the properties and structuring these complex DST offerings, the Sponsor is required to close on the property before opening it to investors as a Delaware Statutory Trust. This means the Sponsor bears the risk of securing long-term financing for the properties, in addition to the costs associated with setting up the DST to facilitate 1031 exchanges.

Potential risks of investing in farmland as a DST may include the value of the farmland itself decreasing or depressed commodity prices over a long period of time. However, the historical trends of farmland suggest that investors who choose to diversify their portfolio within the farmland asset class may hedge against inflation.

Final Thoughts

Investing in a farmland DST through AcreTrader alongside DST Farmland may be an attractive way to achieve the tax benefits of a DST while adding the diversification benefits of farmland offering to your portfolio. Learn more about how your investment in a DST through AcreTrader could benefit your financial goals as part of a 1031 exchange by speaking with a member of our knowledgeable team today. Before investing, we recommend you also consult with a financial advisor and take into account your individual portfolio and financial goals.

The above content is not intended to be a comparison between products but is intended for general, educational, and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability, and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors, and objectives. Investments are considered speculative, involve a high degree of risk, and therefore are not suitable for all investors.

Clicking some links in this article will take you to websites independent of and unaffiliated with AcreTrader. The information and services provided on these independent sites are not reviewed, guaranteed, or endorsed by AcreTrader or its affiliates. Please keep in mind that these independent sites' terms and conditions, privacy and security policies, or other legal information may be different.

Specific Risks of 1031 Exchanges 1031 exchanges are complex and subject to significant conditions, restrictions, limitations, time constraints, fees and expenses, and other risks. See Tax Risks in the PPM for more information.

Specific Risks of Delaware Statutory Trusts DSTs are subject to unique risks including, but not limited to regulatory risk and potentially negative tax consequences. Please see the risk factor section in the PPM for more information.