By Dwight Kay, CEO and Founder of Kay Properties and Investments, LLC
If you’re looking for a clear and concise answer to this question, here it is: Yes, you can 1031exchange out of a DST. If you’re the type who wants to know a little more about the hows and whys of 1031 exchanges and DST, we at Kay Properties are happy to elaborate.
First things first, a DST is a Delaware Statutory Trust. DSTs are a vehicle for passive real estate ownership that allows investors to remove themselves from day to day headaches of property management as well as the opportunity to diversify* their equity in an effort to reduce risk. Each individual investor possesses his or her own share, including potential income, tax benefits, and appreciation of the DST property.
The question of “Can I 1031 exchange out of a DST?” should be answered in two parts. First, when the DST property itself goes “full cycle” meaning the property is sold on behalf of investors. Second, when an investor wants to sell out of their DST position prior to the DST as a whole going full cycle.
Full Cycle – Yes, you can 1031 exchange out of a DST when the property goes full cycle. Once the DST sponsor has sold the asset per the DSTs business plan each individual investor then has the same options as they had when they first exchanged into the DST: They can exchange into any other type of like property that they would own and manage on their own, they can exchange into more DSTs or they can pay their taxes.
Prior to Full Cycle – The answer to can you 1031 exchange out of a DST prior to the DST itself selling is a bit more detailed. DSTs are considered illiquid investments as they are real estate which itself is considered illiquid as well as there is no stock market type exchange whereby you can log online and sell your DST investment quickly. Therefore investors should only purchase a DST via a 1031 exchange if they are willing to hold for the full life of the investment which could be 5-10 plus years.
That being said Kay Properties has a DST Secondary Market whereby an investor that wants to sell early and 1031 exchange out of the DST has the potential to sell. The Kay DST Secondary Market is made possible due to the fact that we work with many DST buyers on a daily basis. Kay Properties helped clients purchase approximately 300 million of DST investments in 2018 this volume allows us to be a resource for those wanting to sell a DST investment early as we are working with many, many DST buyers nationwide. Again, there is no guarantee that you will be able to sell your DST investment on the Kay DST Secondary Market however it is a potential option.
When you sell your share of a DST and want to 1031 out of it, all the same rules apply as though you were selling a traditional investment property. You must use a Qualified Intermediary, you must identify your up leg within 45 days of the closing of your relinquished property and you must close on your up leg within 180 days of the closing of your relinquished property.
For a list of 1031 DST properties please visit www.kpi1031.com as well as your will find more helpful articles and resources as you are considering 1031 exchange DST properties.
*Diversification does not guarantee profits or protect against losses.