When you join a Delaware Statutory Trust (DST), there are certain features that you should take into consideration, such as the DST holding period, which is the length of time you’re expected to keep your investment in the trust before the underlying property is sold.
What is the typical timeframe? And what does this have to do with 1031 exchange holding periods? Realized 1031 has shared a straightforward guide to answer these questions below.
Defining the DST Holding Period
Holding periods are the length of time an investor retains ownership of an asset before selling it. These timeframes are necessary for a wide range of reasons. While the IRS does not define a minimum holding period to establish investment intent, many tax practitioners and advisors feel that a one or two-year holding period is enough to prove your investment intent.
In the context of DSTs, the holding period is generally projected in the private placement memorandum. This timeline refers to how long the trust holds the underlying real estate property before liquidation.
Why are holding periods necessary? A defined holding period allows the property time to potentially generate income and appreciation, supporting the investment objectives disclosed in the offering materials. The other reason is for tax-deferral benefits, especially if the investors entered the DST through a 1031 exchange.
Without a holding period, the IRS may scrutinize the transaction more closely, potentially disqualifying the tax-deferred status if the exchange is perceived as a mere temporary parking of funds rather than a genuine investment.
How Long Is the Typical Holding Period?
In general, the typical holding periods last between five to seven years. There are some that can be as short as three years, and there are those that can be as long as 10 or 12 years. Whatever the case, investors must perform due diligence to determine if the holding period is suitable for the type of property owned by the DST. For example, a shorter holding period might be acceptable for a multifamily property in a rapidly growing area, while a longer time frame could be more appropriate for a net-leased property with a long-term tenant.
Effects of the Holding Period
DSTs have a stricter holding period compared to other types of investments. Your capital is essentially locked in, leading to illiquidity. As such, investors who foresee the need for liquid cash in the near future may find DSTs not suitable for their needs. In addition, there is a lack of a secondary market for selling fractional interests. Given how DSTs are private investments, investors may find it difficult to find buyers for their shares. In most cases, you will need to wait for the holding period to be over to finally access your capital and any appreciation.
Can You Exit a DST Investment Before the Holding Period Ends?
Yes, in theory. If you’re able to find a willing buyer for your fractional shares. This process will prove difficult because of the lack of a secondary market, which we mentioned. Plus, you’ll have to consider possible tax consequences, especially if you entered the DST through a 1031 exchange. The sale could be a taxable event, triggering significant capital gains taxes in the year of the sale.
Wrapping Up: The Delaware Statutory Trust Holding Period
Understanding the holding period of DSTs is critical to help you determine if an offering is suitable for your investment goals and risk tolerance. While the typical timeframe is between five to seven years, some DSTs can have holding periods lasting 10 to 12 years. Make sure to perform due diligence to find this information within the offering documents and assess whether this timeframe aligns with your long-term financial plans and liquidity needs.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.investopedia.com/terms/h/holdingperiod.asp
https://www.investopedia.com/terms/o/offeringmemorandum.asp
https://smartasset.com/investing/delaware-statutory-trusts-dsts
