Can You Invest in a DST Without a 1031?

Rolling over proceeds from the sale of an investment property into a Delaware Statutory Trust (DST) is one option for investors who need to complete their 1031 exchanges and benefit from the deferment of any capital gains tax liability generated on the disposition of their relinquished properties. 

DST investments can provide a number of potential benefits for 1031 exchange investors outside of deferred capital gains. DST Investments can be tailored to the exact amount needed to satisfy exchange requirements, and since DSTs are pre-packaged offerings, investors may be able to move quickly to meet strict 1031 exchange timeliness. 

You also can invest in Delaware Statutory Trusts without a 1031 exchange. You won’t receive the important tax benefit of deferred capital gains, but you can make direct cash investments in DSTs if it’s a strategy that meets your investment goals. 

Let’s look at six reasons why this strategy might make sense for accredited investors. 

1031 Exchange Eligibility  

Delaware Statutory Trusts are often an attractive option for 1031 exchange investors because DSTs are eligible for 1031 exchange tax treatment both up front and upon exit. Once the DST investment reaches maturity, you have the option of exchanging your beneficial interests in the DST into another Delaware Statutory Trust, or purchasing a suitable like-kind replacement property and continue to defer any accrued capital gains taxes on the sale of your original investment property. 

Since DSTs are eligible for 1031 exchange treatment when the investment has reached its full life cycle – commonly between five and ten years – you could make a cash investment into a DST, and use the 1031 exchange process to defer any capital gains taxes if the asset that was held under trust appreciated in value and your initial capital investment significantly increased in value. 

Access to Large Commercial Properties 

DSTs benefit immensely from having a large pool of investors. The joining of financial strength allows the DST Sponsor to increase its purchasing power and target commercial properties that often are well beyond the financial means of solo investors.  

DST Sponsors may acquire commercial real estate in a variety of sectors, such as multifamily apartment and student housing complexes, multi-story office buildings, large industrial warehouses, and sprawling e-commerce distribution or self-storage facilities – assets that typically have valuations in the tens of millions of dollars, or greater, and could potentially deliver increased yield versus much smaller commercial properties. 

Uncorrelated Assets 

The types of real estate mentioned above are often the kinds of commercial assets owned by real estate investment trusts (REITs). While REITs are another way of participating in high-value commercial real estate, REIT investors own shares of REIT stock rather than equity in a property. DST investments are considered direct property ownership by the Internal Revenue Service, even though DST investors own beneficial shares of the trust rather than actual equity in the properties that are held under trust. 

Since the properties held by DSTs aren’t owned by a publicly traded entity, the DST isn’t subject to bear movements in public equities markets that may trickle down to the asset level for REITs and result in adverse property performance. 

Attainable Investment Minimums 

Purchasing a $100 million senior housing facility is likely far too heavy a lift for many solo investors. Investors can still participate in this type of real estate, and similar types of high-value commercial investments, through a DST. Direct cash investment minimums in DSTs are often as low as $100,000. 

Portfolio Diversification 

You can spread your cash investments across multiple DSTs in order to provide increased portfolio diversification by asset type as well as geographical location. You could directly invest in a DST that has a student housing facility in Maryland, and a DST with a self-storage facility in Texas, to help provide a potential buffer against regional economic downturns or adverse market conditions in a certain type of asset class. 

Passive Investments 

Landlords often have no shortage of horror stories to tell about the difficulties of managing their properties. Directly investing in a Delaware Statutory Trust allows you to potentially reap some of the benefits associated with direct property ownership without the hassles of being a landlord. DSTs are passive investments – all decisions regarding the operations and management of properties held under trust are made by the DST sponsor. You’ll have no control over your investment (making sponsor and asset due diligence extremely important), but you also won’t have to deal with tenants, rent collection, lease negotiations, property taxes, maintenance, repairs, and a myriad of other responsibilities typically tied to direct property ownership. 

Closing Thoughts 

Making direct investments in Delaware Statutory Trusts poses a variety of risks, including illiquidity, interest rate, regulatory, and execution risk, among others. A variety of fees are also baked into DST offerings that could impact the overall yield on potential returns. 

However, DSTs also offer the potential for regular income distributions and capital appreciation. Exchanging into a DST is a common approach for 1031 exchange investors, but you also can make direct investments into a DST if doing so aligns with your investment goals.