DSTs for Out-of-State and Absentee Owners

After closing there is nothing to manage from afar, because the trust agreement gives you no operating role

In a filed DST trust agreement, the trust's activities are managed exclusively by the manager, the property is leased to a master tenant, and investors have only the right to receive distributions; they may not direct the trust or take part in management in any way. A lender's DST memo adds that the sponsor typically controls the master tenant and any property manager, who handle leasing, expenses and most repairs.

That structure exists for tax reasons. Rev. Rul. 2004-86 limits the trustee to collecting and distributing income, which is what lets the IRS treat you as owning real estate rather than a business. For an owner who has been managing a property from another time zone through a local manager, the change is total: no repair approvals, no leasing decisions, no vacancy calls. The flip side, giving up every decision, is covered at DSTs for landlords going passive.

The sale of your old property is where distance costs money: withholding and claw-back filings

Many states withhold income tax from nonresident sellers at closing, and most excuse an exchange only if the right form reaches the closing agent in time. California's Form 593 instructions are a clear example: withholding is 3 1/3% of the sales price, a deferred like-kind exchange is exempt at the initial transfer, but if the exchange fails or you receive more than $1,500 of cash or other property, the qualified intermediary must withhold.

The same instructions say California requires taxpayers who exchange California property for property outside the state to file an annual information return, Form FTB 3840, so the state can tax the deferred gain when it is eventually recognized. A DST holding property in other states triggers that requirement. Which states withhold and how each exemption works is at states that withhold at closing and state withholding at closing on a 1031.

Where each DST's buildings sit decides your future state returns, so read the property list before the sponsor's address

Because a DST investor is treated as owning a share of the real estate directly, the rent is earned in the state where each building sits. The trust agreement names the real estate and its location in its recitals and exhibit, and the manager's annual report shows the rent, expenses and distributions attributable to you. A sponsor based in one state can own property in five.

So the absentee owner's question flips. You no longer worry about distance from the property, but each income-tax state on a trust's property list can mean a nonresident return every year and again in the year of sale. Counting states before you count trusts, and how home-state credits work, is covered at DST multi-state tax issues. A single-property trust in a state without an income tax adds no return; a portfolio trust across six states can add several.

Every step can be done remotely, but the deadlines are calendar days wherever you live

The federal E-SIGN Act provides that a signature, contract or record relating to a transaction in interstate commerce may not be denied legal effect solely because it is electronic. Your identification notice does not need a trip either: Reg. section 1.1031(k)-1(c)(2) accepts a signed written document hand delivered, mailed, telecopied or otherwise sent to the intermediary before the end of the 45-day period. Sponsors set their own signing requirements for subscription documents, so ask early whether any page needs a notary.

Accreditation can be verified from anywhere. Under Rule 506(c) a sponsor may rely on written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a CPA who verified your status within the prior three months. Distributions are then paid by wire or check to the account you instruct, on the trust agreement's monthly or quarterly schedule.

The 45-day and 180-day periods in section 1031(a)(3) run in calendar days from the transfer of your old property. Living three time zones away does not extend them, so send the notice a day early rather than late in the evening of day 45.

Absentee owners abroad and owners leaving several states face extra layers

If you live outside the United States, withholding on the sale and the estate tax position change; see foreign investors and DST 1031 issues and living abroad with a U.S. rental. If you are weighing a DST against simply hiring a better manager or buying closer to home, the options are ranked at remote landlord exit options.