What is a DST in a 1031 Exchange?
If you’re like most people, you’ve heard of a 1031 exchange – a method of swapping out one investment property for another – but what about a Delaware Statutory Trust, or DST? This guide explains DSTs in 1031 exchanges so you know about all your options.
What is a DST in a 1031 Exchange?
The acronym DST stands for Delaware Statutory Trust, and it’s an entity you may be able to use to defer capital gains tax from the sale of a rental property. Most DST programs are sponsored by large, big-name real estate companies, and they’re offered through securities brokers and dealers. A DST allows passive, fractional ownership in real estate – but it still qualifies as a “like kind” replacement property under IRS Code Section 1031.
Are There Benefits to Investing in a DST?
Many investors find benefits to investing in DSTs, including:
- Access to big properties with a low investment minimum. You may be able to invest in a larger property that you wouldn’t ordinarily be able to access on your own. That can include multifamily apartments, offices, hotels, and even retail and industrial properties.
- You can use a DST to diversify your investment portfolio because you can allocate the proceeds from selling one rental property to a variety of DSTs.
- Passive investing. DSTs have experienced property managers, and most are sponsored by big-name real estate companies. That means they handle property management and all the day-to-day operations of owning a rental – and you’re off the hook.
- Tax benefits. You’re entitled to the same tax advantages as you would be if you were investing in traditional real estate, including depreciation pass-through and interest deductions. You should consult a tax professional so you know exactly what types of tax advantages apply in your situation.
- Low minimum investment. You can invest with a low amount of capital, though typically, investing at least $100,000 allows you more flexibility in diversifying your exchange into several properties.
Related: Common questions about 1031 exchanges
Are There Risks to Investing in a DST?
Though you’ll have to evaluate the risks on your own – and decide whether the potential is right for you – there are always risks involved with investing in real estate. You’ll face many of the same risks you’d face by investing in a single rental property if you invest in a DST. Some of the most common risks with investing in DSTs include:
- Failure to meet all the right requirements for a 1031 exchange
- No guarantee of growth or income
- Illiquidity
- Lack of control of management on the property or properties
Your REALTOR® can talk to you about other risks, as well as potential benefits, of investing in a DST as part of a 1031 exchange.
Related: How do you find good tenants?
Who Should Invest in a DST?
Anyone who wishes to can invest in a DST. However, this type of investment is extremely well-suited to people who want to:
- Earn passive income through real estate
- Invest in professionally managed, institutional-grade assets
- Diversify their portfolios
- Earn a steady cash flow
- Want to defer capital gains taxes through a 1031 exchange
- Need to beat the 45-day identification timeline for a 1031 exchange
Investors can often get into a DST with as little as $25,000.
Related: How to generate passive income by buying a duplex
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