When homeowners accumulate significant equity in their property, they often consider cash out refinancing. This involves taking out a larger loan than the outstanding balance on their existing mortgage and receiving the difference in cash. But what do homeowners typically do with this excess cash?
In some cases, homeowners may use the funds for property renovations or improvements. However, many are opting to invest in Delaware Statutory Trusts (DSTs) to potentially benefit from tax advantages and diversify their real estate portfolios in today’s market.
DSTs are legal entities that allow multiple investors to own fractional interests in commercial real estate properties. They are commonly used in 1031 exchanges, which are tax-deferment strategies that enable investors to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds into a similar property.
The potential benefits of investing in a DST include capital gains tax savings, greater income potential, institutional-grade properties, passive property management, risk diversification, tax savings for estate beneficiaries, low risk of exchange failure, and the ability to close in 3 to 5 days.
However, there are potential drawbacks to consider, such as a lack of management control, lack of liquidity, and exposure to rate and regulatory changes. Therefore, it’s essential to carefully assess individual financial circumstances and goals and work with a qualified financial advisor to determine whether investing in a DST is the right choice.