Entering a Delaware Statutory Trust (DST) generally means sacrificing liquidity for benefits like passive income and tax-deferral. However, there is a way to access your capital even before the holding period is over: selling to an interested buyer in the secondary market. This strategy is possible because of an emerging demand, but it’s still rife with misconceptions and uncertainties.
To help investors understand what’s true and what’s misleading in early liquidation, Realized 1031 shares a guide for common DST liquidity and secondary market myths. Keep reading to gain insights.
This misconception is persistent, especially since DSTs are often marketed as illiquid investments. Investors are convinced that they must wait five to seven years or more before they can access their capital again.
While DST interests aren’t as liquid as publicly traded securities, the restrictions are overstated. You can sell your interests in the secondary market if you no longer want to participate in the DST. There are broker-dealers that specialize in these transactions. Plus, as we mentioned, there’s an emerging secondary market where you can find willing buyers.
One major deterrent to early liquidation is the idea that you’re going to lose capital. That’s because, for past investors who had to sell early, they were in situations where liquidity was critical. They were more willing to take a loss.
While lower valuations can certainly happen, this won’t automatically be the case. Other factors affect the valuation, such as property performance, interest rates, and the remaining holding period. When these factors are favorable, you can still see profits when selling DST interests.
This misconception persists because the DST space hasn’t been historically established, so most investors would only focus on new offerings. This may have been true in the past, but the appetite for resales has changed since DSTs became more well-known.
As we mentioned, there’s an emerging secondary market. Many investors are now seeking mature DSTs because these investments are already past the uncertainty of early lease-up or initial sponsor expenses. Others want DSTs near the end of their holding periods as part of their overall investment strategy. The bottom line is that there are many willing investors. You just have to find the right broker-dealer to access this emerging market.
Waiting for property disposition is one of the only trusted DST exit options, as it ensures that you can reinvest your proceeds into another DST and continue 1031 exchange tax deferral. Selling early will automatically disqualify you from continuing the cycle, resulting in a major tax hit. However, this is not always true. You can continue your tax-deferral if you follow the 1031 exchange rules during the secondary market sale.
The same requirements apply. You cannot take direct control of the proceeds from the buyer, so engaging with a qualified intermediary is still critical for facilitating the exchange. Plus, you must reinvest all the proceeds within the 180-day deadline. It’s just like any other 1031 exchange. As long as the transaction doesn’t undermine the rules, you can continue capital gains tax deferral.
Exiting a DST early is usually prompted by an immediate need to access capital. However, there is a persistent belief that selling in the secondary market takes too long. Finding willing investors and negotiating the value of the DST interests is time-consuming, so the transaction becomes impractical for real-world liquidity needs.
While timelines do vary, many sales still occur within weeks. It’s important that you assess factors like buyer interest, due diligence, and sponsor transfer procedures. These are the considerations that affect the timeline the most. These factors, when aligned, can create an environment where selling can happen within just a few weeks.
Misconceptions are common in the DST secondary market. These myths stem from the fact that early liquidation is still relatively rare, and DST interests are still illiquid for the most part.
There is a secondary market, and reasonable timelines and valuations are possible. However, investors must engage in intensive planning to ensure that the sale comes through with minimal issues.
DST liquidity myths and secondary market confusion are prevalent because these events rarely occur among DST investments. However, these perceived challenges are only misconceptions driven by extreme caution or ignorance. For those who are considering the secondary market for DST 1031 exchange liquidity, it’s important to sift through the truth and the myths. That way, you can set expectations and better prepare if circumstances push you to early liquidation.
https://smartasset.com/investing/delaware-statutory-trusts-dsts
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
https://calawyers.org/real-property-law/what-is-a-1031-exchange/