Beneficial Interest

A beneficial interest is the form of ownership an investor holds in a Delaware Statutory Trust (DST). Rather than holding direct title to the real estate, each DST investor owns a fractional beneficial interest in the trust, which in turn holds title to the underlying property. The reason this matters for 1031 exchanges is that, under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured DST is treated as a direct interest in real property for federal tax purposes, which makes it like-kind to other real estate and therefore eligible to be acquired as replacement property in a 1031 exchange. This treatment is what allows an investor to exchange an actively managed building for a passive, professionally managed interest while preserving tax deferral. Beneficial owners receive their pro-rata share of net rental income, typically distributed monthly, and their pro-rata share of any gain when the property is eventually sold, but they have no authority to manage or make decisions about the property, which rests with the trustee and, through a master lease, the sponsor's affiliate. Beneficial interests are securities, sold through a private placement to accredited investors under a private placement memorandum, and they are generally illiquid, with no public secondary market, so investors should plan to hold for the full duration of the offering, often five to ten years.