Business Management

The Delaware Statutory Trust: What Real Estate Investors Need to Know

Expertise: Landlording & Rental Properties, Business Management, Personal Finance, Real Estate News & Commentary, Real Estate Investing Basics
94 Articles Written
simplifying-goals

Let’s take a look at Delaware statutory trust law to find opportunities for real estate investors.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

How Does a DST Help Investors?

Every investor is eligible for a Delaware statutory trust—anyone is eligible for one—but some investors are better served by one than others. Among those who may see more advantages are:

  • Anyone doing business in California. (More on that detail below.)
  • Investors holding multiple properties or seeing growth at a rapid scale.
  • Investors looking for high security in their asset protection plan.
  • High-earning and high net worth individuals.

real-estate-investing

Related: Lawsuits Are a Big Business—Here’s How to Shut Them Down

Are You Doing Business in California?

Investors looking toward California should be prepared to navigate the state’s unique laws and agencies, especially the dreaded Franchise Tax Board (FTB) and its effect on asset protection structures. The FTB has final say on who is “doing business in California.”

The full text of their definition is a slog, as any tax agency’s documents would be, but we’ve translated the FTB’s criteria of what it means to be “doing business in California” into a plain English checklist.

  • Do you make money in California? (“Engage in any transaction in California for the purpose of financial gain or profit.”)
  • Was your business formed in California? (“Are incorporated or organized in California.”)
  • Can you work or operate in the state? (“Have qualified or registered to do business in California.”)

But even if you couldn't check any of these boxes, if you're a member of an LLC or partnership that is doing business in the state, you can still qualify. Especially if:

  • The LLC is in California and runs operations there.
  • At least 25 % or $50,000 in sales, whichever is less, happen in California, even if the property is owned by the LLC.
  • The amount of compensation in California paid by the LLC exceeds $50,000 or 25% of the total compensation paid.

So even an out-of-state organization can easily be “doing business” in California and is thus subject to the $800 franchise tax.

Related: California Investors: Why DSTs Are Better Than LLCs (Hint—Taxes!)

calculator with less tax and more tax buttons

Bottom Line: DSTs Are a California Investor’s Best Friend

You’ve heard the phrase “the rich don’t own assets, they control them.” This is because the wealthy are protecting their real estate investments in holding structures that allow them to retain control of investment properties as a beneficiary without technically being the “owner” of a property.

If you are a California investor or simply doing business in California through partnership in an LLC, you should know how to avoid California franchise tax. A Delaware statutory trust is not included among the business structures required to pay the annual $800 franchise tax per entity because they are considered an estate planning tool and not a traditional company.

A DST is similar to other real estate asset protection entities that are helpful for protecting your assets. Like an LLC or Series LLC, a DST may sue or be sued, but you are also protected from liabilities. DST is an intellectual grandparent of the Series LLC, but both tools take advantage of a parent-child structure to provide protection.

Questions? Comments?

Let’s discuss below.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real est...
Read more
    Basit Siddiqi Accountant from New York, NY
    Replied 3 months ago
    All the costs have to make sense for the value/services that they provide. I seen some attorney's suggest the DST to avoid paying the $800 annual fee but paid $5,000 for the setup of the DST and thousands in annual upkeep just to keep the account active. I think if you are suggesting cost savings of avoiding the DST - the cost of the DST formation should also be discussed - comparing apples to apples.
    Justin R. Rental Property Investor from Newbury Park, CA
    Replied 3 months ago
    $800 per LLC, including "child LLC's" add up very quickly. Many investors would spend well over the 5k in franchise taxes alone in the very first year. I have a DST, it was pricey for the setup but paid for itself within the first year. Annual maintenance cost is zero.
    Basit Siddiqi Accountant from New York, NY
    Replied 3 months ago
    I am not a fan of CA's $800 per LLC requirement. Yes, fees can certainly add up if you have a series LLC operating in CA. I was just asking the author to be more transparent with all costs. LLC's are more common and some investors are able to create them cheaply by themselves. DST's are more rare and 100% require an attorney to set up. If cost savings are the "reason" to have a DST over an LLC, then the costs for a DST be disclosed. That is all I ask - full transparency.
    Scott Smith Attorney from Austin, TX
    Replied 2 months ago
    Basit: Agreed. We will update the article with more "apples to apples" price comparisons as soon as we can.
    Chris Mills Investor from Northern VA
    Replied 3 months ago
    My primary experience with DSTs is regarding the 1031 Exchange benefits. It's one of the best tools I have in my bag. I rarely ever think of these from an operational standpoint, without an immediate or future sale in mind. Thank you Scott for an interesting perspective.
    Scott Smith Attorney from Austin, TX
    Replied 2 months ago
    Thanks for reading, Chris.