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Understanding the Benefits and Considerations of DST Ownership
A Delaware Statutory Trust (DST) is one structure investors may consider when selling investment real estate and completing a 1031 exchange. A DST can provide an ownership interest in a portfolio of commercial properties without requiring the investor to manage each property directly. The structure has several potential benefits, but it also involves giving up control and accepting the risks that come with real estate investments.
Diversification and passive management
A DST may hold multiple properties, which can spread an investment across different locations, property types, tenants, industries, lease terms, or debt arrangements. This can reduce reliance on any single property or tenant, though it does not remove investment risk. The sponsor handles property management, accounting, and investor services. Investors may receive income generated by the properties without taking on the day-to-day responsibilities of ownership. Distributions and income are not guaranteed.
Investment amount and timing
A DST may offer flexibility when matching an investment amount to the requirements of a 1031 exchange. Depending on the offerings available, investors may use one or more DST investments to address their exchange needs. The source document also notes that some DST investments may be able to close within one to three days because underwriting, due diligence, financing, and property closing have already taken place. Timing depends on the specific offering and transaction, so investors should confirm whether it fits their exchange deadlines.
Planning for a future exit
Some DSTs are structured with more than one potential exit path. Depending on the offering, investors may be able to pursue another 1031 exchange, exchange into a REIT through a 721 transaction, cash out, or use a combination of these options. These possibilities vary by DST and are not guaranteed. The terms of the offering will determine what choices may be available and when.
Questions to consider before exchanging
A DST is not a fit for every property owner or every 1031 exchange. Investors should consider whether they are comfortable giving up direct control of the property and relying on professional management. They also need to confirm that the property being sold qualifies for a 1031 exchange; a personal residence or second home does not qualify under the criteria described in the source document.
The sale timeline, use of a Qualified Intermediary, remaining mortgage debt, and adjusted cost basis can also affect the exchange. For example, investors who have already transferred sale proceeds to a Qualified Intermediary have limited time to identify and close on replacement property. The amount of debt on the property may affect which replacement investments can meet the exchange’s financing needs. And when the adjusted cost basis is close to the expected sale price, the potential tax liability may be small enough that an exchange deserves a closer look rather than being assumed necessary.
If you own investment real estate and are considering a 1031 exchange, contact Verus Financial Group to discuss how the potential benefits and considerations fit into your broader financial picture. A review with your advisor, along with guidance from your tax and legal professionals, can help you understand the details before making a decision.
DSTs are speculative and illiquid investments and may result in a complete loss of principal. Features and potential benefits vary by offering and do not guarantee performance. Investors should review the offering documents and conduct due diligence, and consult their tax and legal professionals before investing.
The information presented in this article is provided for educational purposes only. The article includes a discussion of Delaware Statutory Trusts ("DSTs") and other real estate-related investment structures with ExchangeRight. The information presented does not constitute an offer to sell, or a solicitation of an offer to buy, any security, including any DST interest. DST interests are securities offered only pursuant to a Private Placement Memorandum to accredited investors and are subject to significant limitations. DSTs are not suitable for all investors and involve a substantial degree of risk. Verus Financial Group is not affiliated with and does not receive compensation from ExchangeRight in connection with the material presented here. Advisory services are offered through Verus Financial Group, an investment adviser registered with the U.S. Securities and Exchange Commission.
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