A Delaware Statutory Trust (DST) is meant to be a longer-term investment with around 5-7 years holding periods. Investing in a DST generally means you won’t need access to those funds for a while.
But what happens if you do? Are those funds locked in for the full duration of the holding period? Not exactly. DST investors do have options when it comes to cashing out early. We’ll discuss those options and what happens for investors who hold for the full investment duration.
Exiting A Delaware Statutory Trust Early
Can you cash out of a DST early? Yes, it is possible to cash out of a Delaware Statutory Trust (DST), but it may not be easy. DSTs are illiquid investments, so it may be difficult to find a buyer for your interest. If you do find a buyer, you may have to sell your interest at a discount.
Those investors who go ahead with exiting early anyway have a couple of options. They can take the cash, which creates a taxable event. In addition to federal and state taxes, the depreciation recapture tax (25%), and the Medicare Surtax (3.8%) will be applicable.
Besides taking the cash, investors can do a 1031 into another eligible like-kind property or DST. A 721 exchange may also be an option. Note that these options are also available to those who hold until the end of the investment period.
Whether an investor exits earlier or stays for the duration of the investment, early exit strategies should always be explored before investing in a DST. Early exit options can vary from DST to DST.
Cashing Out on the Exit Date
Holding the DST until the exit date published by the sponsor is called holding the DST for its full investment cycle. At the end of the investment cycle, most or all of the properties in the DST will have been sold, so the investment comes to an end.
Like the early exit investor, those holding for the full duration must decide whether to keep the cash or continue deferring gains. Keeping the cash creates a taxable event. However, those gains may be taxed at the long-term capital gains rate. Also, note the additional taxes from above that may apply as well.
If the investor wants to continue deferring gains, they can do a 1031 exchange into another DST, real property, or a 721 exchange. Gains will continue to defer until the investor sells their investment.
Investors not wanting to manage rentals may consider returning to another DST vs. real property.
Cashing out of a DST does involve tax implications. It’s best to work with a tax specialist to fully understand those implications.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
Investors who have sold real estate and executed a 1031 Exchange into a DST may execute future 1031 Exchanges and continue to defer taxable gains. Alternatively, a client may enter into a transaction pursuant to IRS Code Section 721 (also known as an UPREIT transaction). In an UPREIT transaction, Clients will receive, at the REIT Sponsor’s option, cash or OP units. OP units are units of an operating partnership that is wholly owned by a REIT. If the client receives OP units, he or she has exchanged into a security and therefore no longer owns real estate and cannot execute another 1031 Exchange out of the OP units and into other real estate. However, pursuant to IRS Code Section 721, the UPREIT transaction into the OP units may qualify as a tax-deferred exchange. The disposition of their interest in OP units will result in a taxable transaction, including the recognition of their deferred capital gain and any depreciation recapture. The client’s gain will only be recognized upon sale or disposition of the OP units.
There is no guarantee that an UPREIT transaction will occur. The option for this transaction is at the discretion of the REIT Sponsor. Some DSTs allow the client to choose whether to take OP Units or cash. Clients should consult the prospectus and their advisor regarding the specifics.
