DST Property Spotlight

DSTs qualify as a like-kind property with a 1031 Exchange. This allows real estate investors to defer paying capital gains taxes on the sale of an investment property, often resulting in significant savings. In some states, capital gains taxes can be as high as 42.1%, including federal capital gains tax, state capital gains tax, depreciation recapture tax and net investment income tax. 

Typically, DST properties are structured with an emphasis on cash flow. By acquiring high-quality institutional property in cities with strong projected growth, DSTs can focus on seeking to preserve investment value and greater income potential for investors. The monthly income varies from trust to trust depending on the property type and investment thesis, but often, independent investors may be able to generate more monthly income through the ownership of a DST property than through direct property ownership.

Although a DST can own nearly any real estate asset of any quality, the underlying real estate held by DSTs tends to be high-grade institutional property. “Institutional grade” generally refers to a property of sufficient size and stature to merit attention from large national or international investors, and typically have the characteristic of high quality assets in major markets and at price points beyond the reach of individual investors and smaller partnerships.

Due to the rigid criteria established by the IRS for a DST to qualify as an exchange property, lower-quality assets are rarely eligible. As a result, DSTs often own high-quality assets with credit-worthy Fortune 1000 companies as tenants. If not for the DST structure, these properties would otherwise be unattainable for an independent investor to purchase via a 1031 Exchange. 

The minimum investment for a 1031 DST is typically $100,000 – significantly lower than the costs of purchasing commercial property outright.

Investors can effortlessly exchange into preferred real estate markets and favorable property types, optimizing their portfolio value.

DSTs are passive investments. As such, individual investors have no participation in the daily management or operations of the DST real estate. Once you select a DST investment and acquire your ownership, your work is done. Through a 1031 Exchange, investors can exit a management-intensive asset and shed landlord responsibilities without foregoing the benefits of owing investment real estate. This is a particularly attractive benefit for independent investors with major life changes ahead—for example, those entering retirement, growing a family or planning for an estate transfer. 

DSTs have a comparatively low minimum investment requirement, usually $100,000, making it easy to diversify across multiple assets to help mitigate risk. Under the IRS’s property identification rules for 1031 Exchanges, investors can reinvest the proceeds from an investment property sale into multiple DSTs, creating immediate investment diversification among different DST property types and locations. 

DSTs also offer estate planning benefits. Through a step-up in basis, beneficiaries can defer capital gains, depreciation recapture and net investment income tax upon the death of an owner. The estate can also divide a DST investment seamlessly among beneficiaries, something that is generally challenging for traditional, directly-owned fee simple real estate assets.

As an illiquid investment with fractional ownership, a CPA is able to discount a DST investment when calculating the value of the total estate. It is not uncommon to see discounts ranging from 20% to 30%, which can serve to reduce potential estate taxes.

DST exchanges rarely fail because the real estate has already been vetted and acquired by the DST sponsor. Using a prominent 1031 Exchange Advisor helps reduce the probability of a failed exchange. Real Estate Transition Solutions thoroughly vets all DST sponsors and DST properties. We believe a quality-control process and higher-grade investment opportunities help lower risk of a failed 1031 Exchange.

Given the DST Sponsor has already acquired the properties within a Delaware Statutory Trust, investors can purchase the beneficial interests in the trust quickly compared to many other replacement property options. This is ideal for a time-sensitive 1031 Exchange or for those investors who value continuity in their income as DST investors can typically close within 3 to 5 business days following the sale of their relinquished property.