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Benefits and Risks of a DST

The Benefits For Using a DST

  • The DST is the single owner and borrower; the lender only underwrites the DST, not each individual investor, therefore the loan is non-recourse to the investor. Investors purchasing property on their own may have to arrange for financing and may be required to provide personal guarantee.
  • The transfer of beneficial interest in a DST can be easier as there are generally less paperwork and time required than buying a property directly.
  • A typical minimum investment of $100,000 allows more flexibility for investors to diversify their exchange into several properties compared to trying to purchase a property directly.
  • The DST allows cash investors (non-1031) the option to complete a 1031 tax deferred exchange when the current property is sold.
  • Investors are not required to sign on guarantees for non-recourse carve-outs on the loan that they might have with direct ownership.

Potential Drawbacks of DST Ownership

  • A DST investment is an investment in real estate; any investment in real estate is subject to market value and rental income fluctuations, tenant issues, vacancies, taxes, and government regulations. There are costs and fees associated with a DST investment and management and the tax benefit must be weighed against the investment costs.
  • A DST owner does not maintain management control or dictate day-to-day property management operations. DST ownership is also subject to additional IRS regulations that affect the management of the property and your ownership interest. Investors should investigate and thoroughly understand these issues prior to investing in a DST offering.
  • DST investments are highly speculative and involve substantial risks. No public market is likely to exist for such investments, so it should be understood that there is a lack of liquidity. DST investments are not freely transferable and substantial restrictions may apply to the transfer of interests.

Risks of an Investment in a DST §1031 Exchange

  • Tax laws are subject to change, which may have a negative impact on a DST investment
  • These investments are not suitable for all investors
  • Lack of Liquidity
  • There is no guarantee that an investor can complete an exchange within the 45 and 180 day time frame or that the acquisition of interests will qualify under section 1031 of the Internal Revenue Code
  • The manager of a DST may not modify the lease, make capital improvements or recapitalize the investment. If
    circumstances arise where these changes are required, the DST must spring to an LLC, which could result in an
    investor losing the ability to participate in a future 1031 exchange of the affected properties.

If you have any questions regarding the the benefits and risks of a DST please give Exclusive Financial Resources a call at (980) 242-2533, email Louis Herford at LHerford@Exclusive1031.com or schedule a 15-minute discussion here.