DST Replacement Options For 1031 Investors

A Delaware Statutory Trust (DST) is a real estate trust formed solely for business purposes. DSTs are private governing trusts responsible for buying, managing, administering, and selling real estate properties. DST shares can be purchased as 1031 replacement properties.

DSTs have large structures, and a single DST can possess a hundred or more investors. You can kickstart a DST investment for an amount as less as $100K. This opportunity enables small investors to own institutional-grade properties, which they may not otherwise be able to afford. Not only small investors but any accredited investor can buy DST shares with the help of a real estate broker or agent. If you’re planning a 1031 exchange, you can invest in a DST and qualify for the exchange.

You may also know about 45 days period 1031 exchange under which you must identify a replacement property within 45 days from the sale of your old property. You can free yourself from this pressure of property identification by investing in pre-packaged deals like DST investments.

Perks of investing in DSTs – 

  • No Landlord Duties – As DST properties are managed by experienced property managers, investors are free from management responsibilities.
  • Increased Cash Flow – DST investors generally enjoy a cash flow ranging from 5-7% annually. However, upon adding the capital appreciation plus the amount invested in amortizing the asset, the projected annual return increases to 14-18%.
  • Gain non-recourse debt – Most of the investors often look for institutional-grade, pre-arranged, and non-recourse financing with easy approval. DST investors have the opportunity to invest in properties ranging from all-cash debt-free acquisitions to properties with up to 85% leverage. 
  • Low Investment – DST investments don’t require huge cash. As a DST generally have many investors, a DST investment may start from as low as $100k. Consequently, beginner investors can add DST properties in their portfolio by making a small investment.
  • Locate properties without sweating – DST investors don’t need to get on the street for locating properties. The real estate firm, which is also the sponsor, is responsible for locating properties for the investors.
  • Diversification – DST investment is a great option for investors who are looking to diversify their investment portfolios. As a DST investor, you can split your proceeds and invest them in different properties or assets.
  • Multiple Tax Advantages – As mentioned earlier, DST shares qualify for 1031 exchange replacement properties. An investor can exchange any investment property for DST shares using a 1031 exchange and defer up to 100% capital gains tax. In addition, DST investors may also benefit from depreciation and other deductions, which shelter a portion of their income from taxes.

It won’t be right to say that DST investors are not exposed to any risk. Just like any other investment, DSTs also have a few drawbacks. As a DST investor, you will be exposed to the following risks –

  • No property title – DST investors don’t receive the property title. As a DST comprises of many investors, it’s impossible to transfer property title in the name of one or all investors.
  • No voting rights – DST investors have no voting rights. In case of any dispute, the trustee is responsible for coming up with the solution. This may upset a few investors who like to play a part in decision making.
  • Can’t form single-member LLC – DST investors aren’t allowed to form single-member LLC.

Undoubtedly, DSTs do have a few limitations that may upset some investors. However, these drawbacks can be ignored considering the benefits that DST investment offers.



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