While most DST investors remain in their DST investments for the full ownership cycle, situations can arise when an investor may need to sell some or all their investment prior to the sale of the entire DST.
The investment period of a DST is typically 5-10 years and the trustee of the DST is solely responsible for determining when the asset is to be sold. The investors do not have any control of the sale date. The sale date is generally no later than when a loan on the property matures since DSTs are prohibited per IRS rules to refinance. The typical loan term for a DST is 10 years. While DST loans can be generally assumed for a relatively low assumption fee, they carry a substantial penalty if they are paid off earlier than the loan maturity date. A holding period of 5 – 10 years may also be needed to allow enough property appreciation and cash flow generation to offset acquisition and marketing costs associated with the offering.
Unlike stock shares and other liquid investments which can be bought and sold even on the same day, DST interests are considered illiquid investments which should be acquired and held for the full investment cycle. Upon sale, DST sale proceeds are treated in the same manner as proceeds from other 1031 tax-deferred investments and can be reinvested in other like-kind assets (do not need to be other DSTs) or can be received as cash subject to applicable taxes if not exchanged.
An investor who wishes to exit a DST prior to the sale date determined by the trustee can offer and transfer his/her interests to any other accredited investor, e.g., net worth greater than $1M excluding personal residence or recent annual income greater than $200K.
While DST interests can be sold and transferred to an accredited investor, the most obvious purchasers of DST interests are other investors in the same DST since they have knowledge of the asset and presumably remain pleased with the performance and may wish to acquire additional interests. If an investor believes they may need to consider an early exit, it would be advisable for them to invest in a DST having a greater number of investors e.g., one having a larger amount of equity.
The sponsor of the DST will typically facilitate the initial communications between the investors in the DST, however, the final sale terms will be the responsibility of the parties in the transaction. The DST sponsor and advisor who sold the DST will generally not charge a fee for the transfer of interests. However, the seller of the DST interest may need to offer a discount relative to their original investment to attract a buyer.
The early sale and transfer of interests in a DST will generally have the same 1031 Exchange options as a sale occurring at the end of the investment cycle e.g., the seller can elect to complete another 1031 Exchange or take out cash subject to owed taxes.
Real estate accountants have generally advised clients that they should plan to hold investment properties for a minimum of two tax years to satisfy the intent of 1031 Exchange rules. So, investors looking to “park” their funds in a DST for shorter period than two years might be increasing their risk of adverse tax consequences.
If wish to exit your DST investment early – or wish to explore an early exit on future DST investments, please contact us at 408 392-8822 or email us at info@FirstGuardianGroup.com to discuss options that can best meet your objectives.
BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor. LightPath Capital, Inc