Al DiNicola DST Investments, LLC- Registered Investment Advisor
Delaware Statutory Trusts (DSTs) have been around for about 20 years. This strategy has been a viable part of the 1031 exchange process and a solution for accredited investors since the late 1990s. Many investors may not have heard of this because it’s a Reg D security. The awareness of DSTs remains relatively low because advertising, promotion or solicitation is prohibited. You will not see an ad for DSTs in magazine, financial newspaper (Wall Street Journal, etc.) similar to an advertisement for a Mutual Fund.
However, the popularity for DST cannot be denied. Currently, DSTs now make up about 10 percent of properties used in 1031 exchange. This may be planned for the relinquished property or even as a backup for when a replacement property falls out of contract. DSTs can come to the rescue to back up a potentially broken 1031 Exchange.
The reason for the popularity is very, very simple. It’s almost exclusively a demographically driven phenomenon, meaning the population getting older. So maybe we can blame this on the Baby Boomers. Boomers have had a disproportion impact on everything that they’ve come into contact with from consumption standpoint since the get-go. There is no secret that boomers like o consume things. Over the years this special group of consumers have bought tennis shoes (Nike) luxury cars (BWs) second homes or even large homes affectionally called McMansions.
The energy the boomers had when they were younger cannot be denied. Time has a toll on many people and yes, we hate to admit it boomers now have less energy now that they had when they were young. This group is reaching the retirement age and they represent a demographic block with shifting needs. There is no secret the boomers had the energy to manage their own properties when they were in their 30s & 40s. Some event enjoyed in their 50’s & 60’s. Turning the corner into their 70s and the situation may have changed. DST popularity is be driven by this demography.
Many boomers have built their wealth in the ownership of real estate over their lifetime. This drive may have been to create a legacy to leave to their children or simply to have income from other sources. Real estate was easy to understand and provide a comfort level when it came time for investment. The real estate asset class was accepted. Over the years the boomers have shifted from residential real estate rentals to commercials asset like office, retail, or multi family.
Many boomers have accumulated their wealth through a series of IRC 1031 Tax Deferred Exchanges. In their mind they’re been able to avoid capital gains, tax liability, almost all of it. The word “avoid” is not correct and should be replaced with “deferred”. For those who understand the legacy of wealth building there could be a step up in basis upon a specific event (not to be review in this writing). So how do they continue to have current income from real estate and also build wealth? That is where the boomers are looking to a DST for a solution.
The DST solution provides tax advantaged recurring income, no landlord duties, simplified investment process, can fit any size exchange, institutional quality properties and diversifies real estate holdings. Boomers continue to use a 1031 Exchanges as well as direct cash investment in a DST enjoy this newfound freedom. For boomers looking to simplify their investment lives, and check all the boxes on their list, the DST seems to be a fit.
For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098.