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What are my exit options?

Which Door is the Right Exit? – DST Real Estate Transactions

This is one of the most important questions when entering a real estate transaction particularly, when the investment is a DST (Delaware Statutory Trust) that has been used as part of a 1031 exchange.

DSTs are passively managed real estate investments that are held approximately 5-7 years.  Sometimes hold periods are shorter and sometime longer.  The DST sponsor sells the investment when he believes the investor will most benefit.

Upon the sale the investor may:

  1. Cash out and pay significant taxes.  Taxes include federal capital gains (15-20%) , state capital gains (0-13.3%), depreciation recapture (25%) and Medicare Surtax (3.8%).  Taxes can add up quickly making cashing out the least attractive option

  1. Exchange the DST for another DST.  This continues the deferral of taxes.  If the investor continues to exchange until the DST enters the investors estate, then the cost basis of the DST gets stepped up to the investor’s date of death.  This is know as the “sway ‘till you drop strategy” and may be an effective estate planning tool.

  1. The 721 UPREIT – Many times in a DST the 721 UPREIT option is available.   Under this option, investors exchange their interest in a DST for operating partnership units “OP Units” in a REIT.  Once converted to OP Units, the investor must hold the units for a period of time (typically one year).  After the holding period, the investor may liquidate all or any portion of the OP Units.  Taxes are due when OP units are sold.  This is an important tax planning tool, as the investor has control of when taxes are due.

Please note,  once the investors receives OP Units in a 721 transaction, the shares are no longer able to be 1031 exchanged.

There are pros and cons of using a DST as part of a 1031 exchange.  Please contact your investment professional to determine if DSTs are right for your portfolio.

If you have any questions regarding the delayed exchange process or any other exchange related matter 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.