Delaware Statutory Trust (DST)

• Purpose: Primarily designed for 1031 exchanges, enabling investors to defer capital gains taxes by reinvesting proceeds from a sold property into a DST-held property.
• Structure: Investors buy fractional shares in a trust that owns income-producing real estate (e.g., apartments, office buildings). A trustee manages the property, making it a passive investment.
• Tax Benefit: Defers capital gains taxes on the sale of an investment property. The tax is deferred until the DST property is sold (unless another 1031 exchange is done).
• Investment Focus: Typically involves stabilized, income-generating properties with predictable cash flow, like Class A commercial real estate.
• Liquidity and Control: DSTs are illiquid—you can’t easily sell your stake—and investors have no control over management decisions, as the trustee handles everything.
• Risk Profile: Generally lower risk because DSTs often invest in established properties with existing tenants and steady income streams.
• Holding Period: No specific holding period, but 1031 exchange rules require the property to be held for investment purposes, typically at least 1-2 years to satisfy IRS intent.

Qualified Opportunity Zone (QOZ)

• Purpose: To spur economic development in underserved communities while offering investors tax benefits on capital gains.
• Structure: Investors roll capital gains from any asset sale (not just real estate, but also stocks, businesses, etc.) into a Qualified Opportunity Fund (QOF), which then invests in projects or properties within a designated Opportunity Zone.
• Tax Benefits:
  • Deferral: Capital gains invested in a QOF are deferred until the earlier of the investment being sold or December 31, 2026.
  • Reduction: If you hold the QOF investment for 5 years, 10% of the deferred gain becomes tax-free; after 7 years, it’s 15%.
  • Elimination: If you hold for 10 years, any appreciation on the QOZ investment itself is tax-free.
• Investment Focus: QOZs often involve development or redevelopment projects, like new construction or substantial improvements to existing properties in Opportunity Zones. These can include residential, commercial, or mixed-use projects.
• Liquidity and Control: Like DSTs, QOZ investments are generally illiquid, and control depends on the fund’s structure—some QOFs allow more investor input, but most are managed by the fund.
• Risk Profile: Typically higher risk because QOZs often involve ground-up development or revitalization in economically challenged areas, where success isn’t guaranteed.
• Holding Period: To maximize benefits, you need to hold the investment for at least 10 years to get the tax-free appreciation, though you can sell earlier with reduced benefits.

Key Differences

1. Tax Strategy: DSTs are tied to 1031 exchanges, focusing on deferring real estate capital gains taxes by swapping one property for another. QOZs allow deferral of any capital gains (not just real estate) and offer potential tax elimination on new gains if held for 10 years.
2. Investment Type: DSTs focus on stabilized, income-producing properties for passive income. QOZs often involve development projects in distressed areas, aiming for long-term growth and community impact.
3. Risk and Return: DSTs are lower risk, with steady but modest returns from established properties. QOZs are higher risk, with potentially higher returns if the development succeeds and the area appreciates.
4. Holding Period: DSTs have no mandated holding period, though 1031 exchange intent often implies 1-2 years minimum. QOZs incentivize a 10-year hold to maximize tax benefits, with partial benefits at 5 and 7 years.
5. Investor Involvement: Both are generally passive, but QOZ funds might offer more variability in investor involvement depending on the fund’s structure.
6. Eligibility: DSTs require you to be selling an investment property to use in a 1031 exchange. QOZs can be used with gains from any asset sale, making them more flexible for broader investment strategies.

Example Scenario DST: You sell a rental property for $1 million, with a $400,000 capital gain. To avoid paying taxes on that gain, you invest the proceeds in a DST that owns a shopping center, deferring the tax and receiving monthly distributions from the property’s income. QOZ: You sell stock for a $400,000 gain and invest that into a QOF developing a new apartment complex in an Opportunity Zone. You defer the tax on the $400,000 until 2026, and if you hold for 10 years and the property doubles in value, the new $400,000 gain is tax-free.