What is a 1031-DST?
A ‘1031-Exchange’ may be used when a taxpayer wishes to defer recognizing capital gains on a real estate property they are selling. A ‘DST’ is a Delaware Statutory Trust, a private trust that may hold real estate, and allow for fractional ownership of that real estate. Investing using a 1031-DST may allow fractional ownership of an institutional sized property that would normally be too expensive to buy.
What are the disadvantages of a 1031-DST?
1031-DSTs are illiquid investments. DST providers choose when to sell the property based on market conditions and funds cannot be accessed. If an investor needs immediate access to the principal of their investment, the DST may not be the right choice for you.
What advantage does a 1031-DST provide?
A 1031-DST provides the deferment of realizing capital gains while allowing investors access to fractional ownership of institutional real estate investments. A DST may provide consistent monthly income to an investor without the typical responsibilities of being a landlord.
How is income generated?
As a fractional owner of a DST property, you are entitled to a portion of income based upon your equity ownership. On a yearly basis, DSTs can provide income between 4.7%-6.2%. Variables that can influence income are based upon market conditions, sector selection, and leverage. Income is not guaranteed, however we select DST providers with extensive expertise in their sector (Commercial, Residential, etc.), and with excellent track records of investor distributions.
Do I have to be an ‘Accredited Investor’?
Yes, 1031-DSTs are for Accredited Investors only. To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years. A person is also considered an accredited investor if they have a net worth exceeding $1,000,000 (excluding personal residence value.) Additionally, Accredited Investors are:
Individuals with certain certifications or credentials; the initial order includes Series 7, Series 65, and Series 82 licenses.
Individuals investing in private funds who are “knowledgeable employees” of the fund, such as the fund’s key executives or employees participating in investment activities.
Certain entities with at least $5 million in corporate or business assets, including limited liability companies, SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies.
Entities formed without the specific purpose of investing in offered securities which own at least $5 million in investments, including tribal governments, governmental bodies, funds, and foreign entities.
Family offices with at least $5 million in assets under management and their family clients.
Spousal equivalents, who may now pool finances for the purpose of qualifying as accredited investors.