DST property has become increasingly popular among accredited 1031 exchange investors for its many benefits.
Management Free Ownership: DST property eliminates the day-to-day hassles of property management, which allows free time to do the things that are more important to you. All the details of rent collection, leasing, maintenance, repairs and bookkeeping are handled by national class, professional property managers. The DST real estate providers (Sponsors), who possess the special expertise in managing commercial real estate, perform the functions of overall asset manager and investor relations management.
Matching or Exceeding Your Loan Needs: It is often difficult to find suitable replacement property that makes financial sense and meets the equity and debt requirements for your 1031 exchange. DST property can potentially be matched to meet your debt and equity requirements and your individual investment needs. DST investors potentially enjoy a monthly stream of income while not having to deal with day-to-day management duties any longer.
Minimum Investment Requirement: DSTs allow the individual investor to purchase a portion of larger, institutional quality commercial property with minimum investments usually as low as $100,000.
Higher Quality Property: Typical DST investment properties in the recent past have been valued between $25-125 million, which prices the average individual investor out of the market. The average investor can own a portion of institutional grade commercial property that is occupied by regional, national, and Fortune 500 credited companies. DST properties include apartment communities, grocery and retail anchored shopping centers, office and industrial complexes, and national and regional single tenant properties.
Diversification: DST investments allow individual investors to take all or a portion of their exchange proceeds and invest them into one or more fractional interests in different property types, geographic markets, and with different real estate investment managers. Diversification potentially offers the investor additional portfolio stability and helps spread financial risk.
Higher Income and Growth Potential: DST investors receive their percentage of the net cash flow, depreciation, and appreciation of the properties they purchase. Investors can anticipate potential monthly cash flow income that may be tax sheltered using depreciation. This cash flow is net of all property expenses, including loan, if any. DSTs potentially offer similar tax benefits as conventional investment real estate only without the management burden. In many cases, investors can earn a higher cash flow and appreciation from DST ownership in a higher valued, quality property than they would in owning conventional residential or small commercial investment real estate. Note all investments, including real estate, carry the risk of loss in addition to possibility of gain.
Pre-Arranged Non-Recourse Financing: Loans, if any, are already in place and have been secured through institutional lenders by the real estate providers (Sponsors) at competitive terms. Typical loan terms secured for DST properties are at a low fixed rate, with non-recourse financing that range in term from 7-10 years and are structured in accordance with the property business plan. For 1031 Exchange purposes, each DST investor assumes their percentage of the existing non-recourse loan, meaning the investors do not have any personal liability for the loan.
Readily Available Property: There are a variety of real estate providers that have a steady and readily available inventory of DST properties. This makes DSTs a 1031 option for investors who need to identify replacement property within the 45 day identification period, need a backup property in case their primary property falls through, or have equity left over in their exchange that needs to be placed. This solves the 1031 timing issue.
Defined Exit Strategy: Each DST property typically has a holding period averaging between 5 -7 Years. The actual holding period may be shorter or longer. Investors benefit from some of the most experienced real estate investment companies that are dedicated to deliver results to their investors and have the discipline to recommend selling when investment objectives have been met, thereby potentially increasing your overall return on investment.
Estate and Tax Planning Tool: DST investments can be a viable 1031 exchange option to potentially assist in building wealth as well as to use them as a vehicle for estate planning purposes. By utilizing DST investments as 1031 exchange replacement property, the taxpayer not only is able to defer the capital gains tax on the appreciation and depreciation recapture of their relinquished investment property, but upon their death and according to current tax law, their heirs receive a one-time step up in tax basis to the fair market value of their DST ownership. Therefore, the entire capital gain tax is wiped out. This can be an ideal solution for those who might otherwise opt to sell and pay capital gains tax in the 25-40% range.
By Leslie Pappas, Founder and CEO