Blog

Subscribe to Our Blog

Subscribe to Email Updates

Featured Post

Recent Posts

How Do Investors Exit DSTs?

DST investments are typically held for 7 to 10 years with the intent of potentially generating ongoing income and benefiting from the property's possible appreciation in value upon sale. Unlike publicly traded stock which can be bought and sold daily, DSTs are not considered liquid investments and, similar to traditional investment properties, investors should be prepared for a longer-term holding period prior to an eventual sale.
In this article, we’ll discuss the process of exiting a DST investment.

A DST Overview

Instead of directly owning property, DST investors own beneficial interests in a trust that are treated as the same as holding title to real property from a tax standpoint. Many investors are drawn to DST’s because they offer professional management of the properties, so the investors don’t have to deal with day-to-day hassles or make strategic business decisions.

DSTs offer an opportunity to diversify assets, facilitate estate planning, and passively invest in real estate, and they typically are set up to last for several years. As with many other real estate investments, returns are not guaranteed and there are risks of potential loss of invested principal.

When a 1031 Exchange Makes More Sense

As you are likely aware, capital gains and depreciation recovery taxes can be deferred in a 1031 Exchange, where the proceeds from the sale of one property are reinvested in qualifying replacement properties. Properties structured as a DST generally qualify for 1031 tax deferral benefits both at the time of acquisition and when subsequently sold.

When the DST Goes Full Cycle

A DST is characterized as having gone “full-cycle” when it is sold. The decision as to the terms and timing of sale is the responsibility of the DST sponsor and not the DST investor. On average the sale of DSTs takes place between 7 to 10 years after it has been created – typically when the sponsor believes the timing is right and the property value is sufficient enough to provide an optimal financial outcome for the investors at the time. DST sales could also occur in less than 7 years if market conditions provide an opportunity for an attractive sale price.

When a DST liquidates, investors have the option to execute another 1031 Exchange by investing in another like-kind property which can include traditional investment properties or other DSTs. They can also forego a 1031 Exchange and take direct possession of sales proceeds subject to paying applicable taxes.

Desire to Sell Before the DST Goes Full Cycle

There are situations that may arise that may motivate a DST investor to consider selling some or all of their investment interests prior to when the sponsor may decide to sell. An unexpected need for cash or a change in an investor’s health may arise that creates a desire to sell early. During the investment holding period, a spouse may pass and the remaining spouse may be relieved of some or all of their tax burden due to receiving a “step up in basis” as permitted under estate tax laws.

While it is rare that DST investors elect to sell their interests early, these types of situations can arise and we are often asked the question, “Can I get out of a DST early and, if so, what is the process?”

Good news: provided the following conditions and steps are followed, it is possible for DST investors to exit a DST investment before it has gone full cycle.

Condition #1: The IRS generally requires that investors who utilize the 1031 process have an “intent to hold” their replacement property for an extended period. The minimum holding period is not spelled out in the tax code, but most tax advisors advise their clients to be prepared to own a 1031 replacement property for a minimum of two tax years.

Condition #2: DST interests can only be sold to “accredited investors” i.e., persons having a net worth greater than $1 million excluding their personal residence or annual income of at least $200,000 if single or $300,000 if married.

Presuming these conditions are satisfied, here are steps that can be taken to conclude an early sale:

Step 1: Contact the firm that was involved with the original purchase of the DST that you wish to liquidate and ask for their assistance. The investor may also contact the sponsor firm directly and seek their assistance.

Step 2: If FGG was the firm that facilitated the investment, we would then contact the sponsor firm on behalf of the investor and assist in determining next steps. Some DST investment agreements grant the sponsor a “Right of First Refusal” (ROFR) to re-purchase DST interests from investors who wish to exit early. If a ROFR is not an option, FGG would then work with the sponsor to market the interests both to other investors in the same DST and to our extensive database of current and past qualified FGG clients.

Investors should note that, unlike public equities, no secondary market exists for DST interests and, somewhat like the sale of traditional investment properties, investors should anticipate that it will take some time to sell the interests. The sales price of interests is not guaranteed and will depend on factors present at the time of sale including market conditions and the level of interest from prospective buyers. It is possible for offers to be below as well as above the value of the original investment.

Step 3: Once a sales prices has been agreed to by the DST investor and a buyer, FGG would work on behalf of the investor to conclude the sale of interests. Note that FGG does charge commissions or fees to assist our DST investors who wish to sell their interests.

The sale may allow both the seller and buyer to take advantage of a 1031 Exchange tax deferral – however investors should consult with a qualified tax advisor to verify details. If the investor wishes to reinvest the funds via a 1031 Exchange, they will need to employ the services of a Qualified Intermediary as was done when concluding the original DST investment.

If you are considering a 1031 Exchange or in the process of completing one currently, do not hesitate to give us a call at 866-398-1031 to discuss DST back-up options for you. We have a wide selection of institutional quality properties located throughout the U.S. and may be able to help you identify one or more properties which may meet your objectives should you other replacement property choices fall through. .

For more informative, feel free to contact us at info@firstguaardiangroup.com.

New call-to-action

Disclosure: DSTs, like all real estate, have risks, including illiquidity, potential for loss of property value, costs and expenses that could offset the benefits associated with tax deferral, and reduction or elimination of monthly cash flow.

Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. 

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing. Paul Getty’s transaction experience includes buy and sell side representation, sourcing, and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031, Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of the Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC.

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is the author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

Your Comments :