While most DST investors remain in their DST investments for the full ownership cycle, situations can arise when an investor may need to sell some or all their investment prior to the sale of the entire DST.
The investment period of a DST is typically 5-10 years and the trustee of the DST is solely responsible for determining when the asset is to be sold. The investors do not have any control of the sale date. The sale date is generally no later than when a loan on the property matures since DSTs are prohibited per IRS rules to refinance. The typical loan term for a DST is 10 years. While DST loans can be generally assumed for a relatively low assumption fee, they carry a substantial penalty if they are paid off earlier than the loan maturity date. A holding period of 5 – 10 years may also be needed to allow enough property appreciation and cash flow generation to offset acquisition and marketing costs associated with the offering.
Unlike stock shares and other liquid investments which can be bought and sold even on the same day, DST interests are considered illiquid investments which should be acquired and held for the full investment cycle. Upon sale, DST sale proceeds are treated in the same manner as proceeds from other 1031 tax-deferred investments and can be reinvested in other like-kind assets (do not need to be other DSTs) or can be received as cash subject to applicable taxes if not exchanged.
An investor who wishes to exit a DST prior to the sale date determined by the trustee can offer and transfer his/her interests to any other accredited investor, e.g., net worth greater than $1M excluding personal residence or recent annual income greater than $200K.
While DST interests can be sold and transferred to an accredited investor, the most obvious purchasers of DST interests are other investors in the same DST since they have knowledge of the asset and presumably remain pleased with the performance and may wish to acquire additional interests. If an investor believes they may need to consider an early exit, it would be advisable for them to invest in a DST having a greater number of investors e.g., one having a larger amount of equity.
The sponsor of the DST will typically facilitate the initial communications between the investors in the DST, however, the final sale terms will be the responsibility of the parties in the transaction. The DST sponsor and advisor who sold the DST will generally not charge a fee for the transfer of interests. However, the seller of the DST interest may need to offer a discount relative to their original investment to attract a buyer.
The early sale and transfer of interests in a DST will generally have the same 1031 Exchange options as a sale occurring at the end of the investment cycle e.g., the seller can elect to complete another 1031 Exchange or take out cash subject to owed taxes.
Real estate accountants have generally advised clients that they should plan to hold investment properties for a minimum of two tax years to satisfy the intent of 1031 Exchange rules. So, investors looking to “park” their funds in a DST for shorter period than two years might be increasing their risk of adverse tax consequences.
If wish to exit your DST investment early – or wish to explore an early exit on future DST investments, please contact us at 408 392-8822 or email us at info@FirstGuardianGroup.com to discuss options that can best meet your objectives.