Delaware Statutory Trusts (DSTs) are popular because of their passive nature, tax-deferral benefits, and opportunities for long-term cash flow. However, certain circumstances require you to liquidate your DST interests before the holding period is over. Whatever your reason, it’s important to understand how off-platform selling for fractional interest occurs, including the challenges and trade-offs you may encounter.
Below, Realized 1031 goes in-depth about how fractional interests are sold in an investment vehicle that’s designed to be illiquid. Let’s take a closer look!
What Are Seasoned Interests?
Generally, you want to sell seasoned DST interests that have been held for a meaningful period. There is no set timeline, but most experts agree that interest can be considered seasoned if it’s been held for two or more years. By this time, the underlying properties of the DST have established operational history, rental performance data, and investor distributions.
Why seasoned interests?
- The IRS still requires you to demonstrate investment intent to remain qualified for 1031 exchange tax benefits. Selling too early could raise a red flag that could result in the loss of your tax-deferred status.
- Buyers on the secondary market want to see a proven performance record before committing. A seasoned DST often provides clearer income expectations and risk profiles than a newly launched one.
DST Fractional Interests: Selling Off-Platform
DST interests are not publicly traded assets. As such, there is no open marketplace where you can find willing buyers. Instead, DST interests change hands through private, off-platform means. Here’s how the process usually works.
- Find a Private Broker or Matching Service: You’ll need to find a specialized firm or registered representative to facilitate the transaction between you and an accredited buyer.
- Communicate with the Sponsor: Most DST sponsors need to approve the transaction before you can do so. They may also have a right of first refusal (ROFR) or specific transfer procedures outlined in the trust agreement.
- Pricing and Valuation: You’ll need to negotiate with the buyer for the selling price of the interest, considering factors like current property performance, loan term, and relevant market conditions.
Tax Considerations When Selling Fractional Interests
The main trade-off of selling seasoned DST interests is that the act triggers a taxable event. The deferred capital gains taxes and depreciation recapture will be finally recognized, including previous deferral from preceding 1031 exchanges within the same cycle. It’s important to plan for this tax hit because the liability could be significant. The best practice is to find other liquidity options altogether and keep holding your DST investment.
Challenges and Market Realities
Before committing to an off-platform transaction, investors must understand the challenges they may face. For one, there isn’t a big secondary market for DST interests. There is an emerging niche, but you still need to set expectations regarding the realities of selling fractional interest.
Beyond the lack of a robust secondary market, you may face illiquidity that leads to prolonged transactions. DSTs may have transfer restrictions that limit who can buy, allowing only accredited investors to participate. Unsurprisingly, the sale can last for weeks or months, defeating the purpose of quick access to your capital.
Wrapping Up: Understanding the Process of Selling DST Interests Before Liquidation
Selling seasoned DST interests is allowed off-platform. You’ll need to work with your sponsor and qualified brokers to find private buyers, but it’s possible to leave the DST early. Keep in mind, though, that such a sale results in tax liability. Plus, the lack of a secondary market can delay the transaction. Patience, due diligence, and a clear understanding of the trade-offs are what you need to pull this off.
Sources:
https://www.investopedia.com/terms/r/rightoffirstrefusal.asp
