Revenue Ruling 2004-86 is a 2004 IRS ruling that addresses how interests in a Delaware Statutory Trust (DST) are treated for federal tax purposes. It concluded that an interest in a properly structured DST can be treated as a direct interest in real estate, which allows a DST interest to serve as replacement property in a 1031 exchange.
Key Points
- A passive trust: To keep that treatment, the trustee’s powers are restricted. Among other limits, the trust generally cannot accept new capital after the offering closes, take on new or refinanced debt, renegotiate existing leases or enter new ones (except in limited cases such as a tenant’s bankruptcy), reinvest sale proceeds, or make changes beyond normal repairs, minor non-structural modifications and those required by law.
- Cash and distributions: Cash held between distribution dates is generally limited to short-term debt obligations, and cash other than reserves must be distributed on a current basis.
- Practical effect: These limits are why many DSTs use a master lease and a business plan that is set at the start of the offering.
To learn more, see how SREI Group approaches DST investments.
Synonyms:
Rev. Rul. 2004-86