Can You Sell Shares of a Delaware Statutory Trust?

Posted Aug 29, 2023

Selling a fractional interest in a Delaware Statutory Trust (DST) begins by reaching out to the advisor who assisted with the original DST paperwork. The advisor plays a key role in coordinating the Delaware Statutory Trust liquidity process, collaborating with the DST 1031 Sponsor to locate a suitable buyer for your share. This organized approach ensures that all legal and financial considerations are addressed, creating a smooth transition that aligns with both the seller's needs and regulatory requirements. It's essential to follow this process for a successful sale and to ensure that all parties are in compliance with the laws governing DSTs. 

Let’s take a closer look at how the process works. 

What are DSTs? 

Delaware Statutory Trusts are legal entities created under Delaware state law to establish a trust. Individual investors in a DST own a beneficial interest in the trust, which is the legal owner of the properties purchased and held under the trust. Even though trust beneficiaries don’t actually own any of the real property held by the DST, the Internal Revenue Service views DST interests as direct property ownership. This important distinction allows DST investors to enter and exit DST ownership structures through the use of a 1031 exchange

Potential Benefits of DSTs 

Accredited investors often participate in DSTs because it allows them to own fractional interests in commercial real estate assets they might not otherwise be able to access. These properties often include large multifamily housing communities, self storage facilities, senior housing centers, industrial and office buildings, and hospitality properties. Investors can potentially receive passive income from the DST without the burden of direct property management. 

Investing in a DST also offers taxpayers a straightforward solution to completing a 1031 exchange since investment amounts can be customized to meet the exact requirements of the exchange. Purchasing shares of a DST also can alleviate issues and delays in closing a traditional real estate transaction, which may make DST investments attractive to investors facing deadlines for completing their 1031 exchanges. 

DST Limitations and Risk Considerations 

Delaware Statutory Trusts have unique risks and limitations. Among them: 

  • DSTs have an initial offering period, and once that is completed the sponsors may not raise additional capital by adding investors. 
  • DST trustees cannot renegotiate loan terms or borrow additional funds. However, there are exceptions for exigent circumstances. 
  • Trustees cannot reinvest the proceeds from the sale of property held by the trust. Instead, any profits are distributed to the investors, who can reinvest through a 1031 exchange if they wish. 
  • Trustees must distribute cash to investors regularly, beyond reserves held for expenses. 

DST investments are subject to economic and regulatory exposure, and sometimes investors may want or need to exit a DST investment prematurely. As a result, DSTs typically have long holding periods and are considered illiquid investments, which is one reason why accreditation is a requirement for participation. 

Can an Investor Dispose of Their DST Shares? 

Delaware Statutory Trusts (DSTs) can provide many important benefits to accredited investors, especially those who need to quickly complete 1031 exchanges after selling an investment property.  

Liquidity needs can change over time, though, and situations may arise where investors desire to sell their beneficial interests in a DST. As mentioned earlier, the advisor who assisted you with purchasing your DST shares will have to coordinate the liquidity process.  

There’s no guarantee that a suitable buyer will be found to purchase your DST interests at a price that’s equitable and meets your needs. That’s why investors considering DST investments should proceed assuming that they will maintain the investment for the full holding period. Investors should carefully evaluate the DST offering, especially the sponsor, since the sponsor makes all decisions for the trust. Investors may want to examine the sponsor’s track record before deciding on whether or not the investment merits consideration. 

Closing Thoughts 

Investors may need to dispose of their DST interests before the investment has fully matured.  

As a seller, it’s up to you to set a value on your DST interests and also to decide whether to accept any buy offers. You can only resell to an accredited investor, and the DST Sponsor typically will need to approve the resale. Selling DST interests will likely result in some tax liabilities in addition to the financial ramifications of the sale. 

There is no guaranteed method to divest interests in a Delaware Statutory Trust; however, there is a secondary market for selling DST shares. Before selling your DST interests to an accredited investor or in the secondary market, be sure to seek qualified financial and tax advice so you know the full ramifications of your decisions. 

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.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

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