Do’s and Don’ts of DSTs
by Bryan Hakola | Nov 4, 2020 | 1031 Exchange, Diversified Investment Strategies, DST
If you are considering a 1031 exchange soon, a Delaware Statutory Trust, or DST, may be a great option for you. With a DST, you own a portion of a trust, called a Beneficial Ownership Interest. The trust owns the underlying real estate. There are multiple DST owners for each trust. This is a great option for a hands-off investment that you are not solely responsible for. This also allows you to diversify your assets more. Examples of DST real estate include multifamily apartment buildings, senior care facilities, shopping centers and more.
Your sponsor is here to help you complete a 1031 exchange, and to help you decide if a DST is right for you. There are some do’s and don’ts to keep in mind when considering a DST.
Here’s what you should do:
1. Do your research. Like with any real estate investment, it’s important to put the time in to read the Private Placement Memorandum so you understand what is expected from you and what the DST entails. We can help you make sense of this, so you choose the right DST for you.
2. Use the DST as backup. Especially in these uncertain times, a DST makes a great backup plan for your 1031 exchange. By choosing a DST for at least one of your three identified replacement properties, you ensure that your 1031 exchange goes through even if the other two properties fall through before deadline.
3. Check the debt ratios. To ensure that you don’t have to pay any federal taxes, or boot, make sure the debt ratio of the DST property works as a replacement property for your 1031 exchange.
4. Diversify. This is one of the many benefits of a DST! A DST’s minimum investment amount can be low, so you may have the option to split your investment among multiple DSTs. This could be multiple property types in multiple locations. This gives you peace of mind.
Here are some things you don’t have to do when completing a DST:
1. You don’t have to manage the property. You own a share in the real estate asset. The management of the property is not your responsibility. This is a great hands-off option for investors who have had it with tenants!
2. You don’t take on liability. The liability of the property belongs to the owner, not the beneficiaries of the DST. Therefore, you have no personal liability for the property, which is also great during these uncertain times.
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