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rlining
Level 2

How is a DST taxed that is operating as (or holding interest in) a business?

I am considering on using a DST (Delaware Statutory Trust) to operate a business in the near future, however taxes are somewhat unclear. The IRC doesnt have a classification of a "business trust" but the IRS states that any trust operating as a business must be taxed either as a corporation, partnership, or sole prop (was looking it up to for awhile since the 1041 doesnt show anything about deducting business expenses like a 1120, 1065, or a 1040 Schedule C would). If the DST wish to operate as a business, how would it apply for an EIN since it would be a trust? Would I just select "Corporation" or "Partnership" or use "Other" and put something like "Business Trust taxed as ......."? I dont think selecting the "trust" selection would be wise to do unless its a must then do the election on Form 8832. I dont know, it just a bit confusing on that part. However, if the DST isnt going to operate as a business but instead hold ownership in a company like an LLC, how would taxes work in that regard since, like before, the 1041 doesnt contain fields for business expenses and I dont think the field with business income (with a schedule c attached) would be used in this regard. Would the beneficiary have to pay SE taxes on that income that flows to the trust and pass through to them?

6 Replies
Critter
Level 15

How is a DST taxed that is operating as (or holding interest in) a business?

What are you talking about ? the DST is opened for only one reason ... to facilitate a 1031 exchange. It only holds the money ... it is not a business and does no business ... it makes no money and pays no wages and has no expenses to declare. In fact it doesn't even file a return. You really need to talk to a local professional for this situation ...

http://www.winthcowealthmanagement.com/delaware-statutory-trust-pros-and-cons
halpalms
Level 5

How is a DST taxed that is operating as (or holding interest in) a business?

it's a trust no matter what so you file a 1041 and a Sch C for the business activity and because this is rare you will need help with filing the right forms.

rlining
Level 2

How is a DST taxed that is operating as (or holding interest in) a business?

Where do you see that a DST doesnt have to file anything or that its to "facilitate a 1031 exchange"? Assuming that the trust doesnt make a change to be treated a corporation,  it would have to file a 1041. While a 1031 exchange is an option for an DST, the laws of delaware doesnt limit it down to just that. In fact, in §3801(g) of the DST Act states "A statutory trust may be organized to carry on any lawful business or activity, whether or not conducted for profit, and/or for any of the purposes referred to in paragraph (g)(1) of this section." In the point of view of the IRS, a DST is no different from any other trust and "would be a simple, complex, or grantor trust depending on the terms of trust instrument." It also states, "The regulations require that trusts operating a trade or business be treated as a corporation, partnership, or sole proprietorship, if the grantor, beneficiary or fiduciary materially participates in the operations or daily management of the business. Filing requirements would depend on this classification."

I do plan on talking to a professional about it soon though.

Rick19744
Level 11

How is a DST taxed that is operating as (or holding interest in) a business?

While your facts are limited, and this forum is not conducive to discuss all the implications, I am not sure why you are considering using this structure.  I am sure that you could utilize another structure that has fewer complexities to accomplish the same result.

 

The DST has numerous requirements one of which is that a trustee must be a Delaware resident.  So if you are not a Delaware resident, you will need to use a Delaware Trust Company to act in this capacity.  This adds additional cost.

 

For federal income tax purposes, the DST can be treated as a grantor trust.  Essentially this means all activity of the DST will just flow through to your 1040.  The DST will, however, need to file a form 1041.  This also adds an additional cost.  

 

Please do seek some legal advice before venturing into this arena as I seriously doubt that this is the best and only entity structure to achieve your business goal.

*A reminder that posts in a forum such as this do not constitute tax advice.*
4Head
New Member

How is a DST taxed that is operating as (or holding interest in) a business?

DSTs can and are be used in many ways:

https://www.morrisjames.com/newsroom-articles-292.html

rlining
Level 2

How is a DST taxed that is operating as (or holding interest in) a business?


@4Head wrote:

DSTs can and are be used in many ways:

https://www.morrisjames.com/newsroom-articles-292.html


Yes I am aware. I probably shouldve posted here but I did talk to an CPA who informed me that a Statutory Trust (eg Delaware Statutory Trust) can be treated as a disregarded entity, partnership, corporation, or a trust for federal tax purposes. If as a trust, its best that it be a REIT, or something similar, but its best to get legal advice on that part. You will need to send in an SS4 and use the other option to mention what youre forming so you can get the proper tax treatment (since the IRS sees a statutory trust or a business trust as an unincorporated association, which would be treated as a partnership for federal tax purpose unless you change the election). Results can usually vary with state tax though since not all states see a Statutory Trust as a legal business entity though most will recognize it as it is at the federal level, while some may have their own laws to have it be treated as a corporation for state tax purposes (eg example of this would be AZ, which do see a business trust, including statutory trust, as a corporation for state tax purpose)

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