Investors Doing Their §1031/DST Research Overview ~ Part Four Investor Expectations  

When investors par­tic­i­pate in a 1031 exchange and select a Delaware Statu­to­ry Trust (DST) as the replace­ment prop­er­ty, there may be a wide range of expec­ta­tions. This is Part Four of the investor dri­ven series called Investor Expec­ta­tions.

May 19, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ist & DST Advisor/Specialist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

How­ev­er, there is a spe­cif­ic set of expec­ta­tions and moti­va­tions. In a recent inter­ac­tion we have reviewed a vari­ety of expec­ta­tions. The recur­ring theme is a group of key expec­ta­tions using a DST in a §1031 tax deferred exchange.

1. Tax Defer­ral

Investors exe­cut­ing a §1031 and uti­liz­ing tra­di­tion­al real estate do so with the inten­tion of defer­ring cap­i­tal gains. If there is a Pri­ma­ry Goal, defer­ral of cap­i­tal gains tax­es may be the pri­ma­ry goal. This is accom­plished by rein­vest­ing the pro­ceeds from the sale of their relin­quished prop­er­ty and rein­vest­ing the pro­ceeds in a “like-kind” prop­er­ty. A DST invest­ment qual­i­fies as like-kind real estate for §1031 exchange pur­pos­es under IRS guide­lines (Rev­enue Rul­ing 2004–86). The oth­er require­ments are to acquire a prop­er­ty of equal or greater val­ue and replace any debt paid off.

2. Pas­sive Income

A goal of cer­tain investors (when they reach a cer­tain age) may be Hands-Off Man­age­ment. This trans­lates mean­ing investors expect a pas­sive invest­ment, with pro­fes­sion­al asset and prop­er­ty man­age­ment by the DST spon­sor. Most investors are seek­ing or accus­tomed to Month­ly Dis­tri­b­u­tions. Typ­i­cal­ly, investors expect to receive reg­u­lar month­ly income dis­tri­b­u­tions (though not guar­an­teed), gen­er­at­ed by rents or oper­a­tions of the prop­er­ty.

3. Diver­si­fi­ca­tion

One of the ben­e­fits of a DST (when com­pared to tra­di­tion­al real estate) would be many DSTs often own large, insti­tu­tion­al-qual­i­ty assets (e.g., apart­ment com­plex­es, med­ical build­ings, indus­tri­al prop­er­ties). In addi­tion, investors can diver­si­fy their real estate hold­ings by pur­chas­ing frac­tion­al inter­ests in mul­ti­ple DSTs.

4. Low Min­i­mum Invest­ment

DSTs often have min­i­mum invest­ment thresh­olds as low as $100,000. Thisal­lows investors to spread pro­ceeds from a relin­quished prop­er­ty sale across sev­er­al DSTs. This may occur by rein­vest­ing the sales pro­ceeds from the sale of the relin­quished prop­er­ty (held by a Qual­i­fied Inter­me­di­ary) and acquir­ing more than one DST.  Typ­i­cal­ly, a DST acqui­si­tion may be $100,000. An investor with $500,000 in sales pro­ceeds may acquire mul­ti­ple prop­er­ties.  There will be addi­tion­al paper­work and addi­tion­al due dili­gence involved.

5. Non-Recourse Debt

One of the require­ments for §1031 exchange to be valid is to replace the debt paid off on the relin­quished prop­er­ty.  This may be accom­plished by adding more cash (aka fresh cash) towards the replace­ment acqui­si­tion. How­ev­er, investors may seek a DST that has lever­age. If the DST uses lever­age, it is non-recourse to investors. This means investors are not per­son­al­ly liable for the loan—important for estate plan­ning and risk man­age­ment. This also means the investor does not need to apply for a loan since the DST with debt is prepack­ages and the investors will receive a pro­rate share of the debt based on the equi­ty invest­ment.

6. Avoid Active Land­lord Duties

Back to cer­tain investors (at a cer­tain age aka baby boomers) may be look­ing to uncom­pli­cate their lives. Investors often choose DSTs after years of man­ag­ing prop­er­ties direct­ly and seek relief from a num­ber of issues.  The often-used ref­er­ence may be to the “Ter­ri­ble T’s”. This is a ref­er­ence to ten­ants, trash, toi­lets and a few oth­er issues. There may also be issues involv­ing com­pli­ance.

7. Estate Plan­ning and Wealth Trans­fer

When we start a con­ver­sa­tion with a poten­tial investor, we also want to under­stand the long-range goals for the §1031. DST inter­ests can be passed on to heirs, who receive a step-up in cost basis, poten­tial­ly elim­i­nat­ing deferred tax­es alto­geth­er. Oth­er investors may seek to name a char­i­ty to be the ben­e­fi­cia­ry of spe­cif­ic DSTs. One of the new­er exit strate­gies cer­tain DST spon­sors may include in the offer­ing is the abil­i­ty for the DST to move into a REIT via a 721 UPREIT upon full cycle or sale of the DST.  We have writ­ten oth­er arti­cles on that top­ic.

8. Access to Insti­tu­tion­al-Grade Real Estate

Tra­di­tion­al real estate may lim­it the qual­i­ty of the replace­ment prop­er­ty, espe­cial­ly if it is a larg­er prop­er­ty. DSTs give retail investors access to class A assets that would nor­mal­ly be out of reach finan­cial­ly and oper­a­tional­ly.

There are always oth­er impor­tant con­sid­er­a­tions or what investors should be aware of with a DST.

• Illiq­uid­i­ty: DST inter­ests are not liq­uid and can be dif­fi­cult to sell.
• No Con­trol: Investors have no vot­ing rights or man­age­ment con­trol once invest­ed.
• Fixed Life Span: DSTs are designed to be held for 5–10 years, after which the prop­er­ty is sold, and gains may be real­ized (tax­able unless rein­vest­ed in anoth­er 1031).
• Mar­ket Risk: DST invest­ments are still sub­ject to real estate mar­ket risks and fluc­tu­a­tions in prop­er­ty val­ues and rents.
• Fees and Spon­sor Risk: Fees and the experience/reputation of the DST spon­sor are crit­i­cal to eval­u­ate.

Investors who take time to review all their options may dis­cov­er if a DST may be a solu­tion to their invest­ment. As always, we can assist with ini­tial con­ver­sa­tions as well as crit­i­cal infor­ma­tion if you are already with­in the 45-day iden­ti­fi­ca­tion peri­od. Because of our con­stant mon­i­tor­ing of the DST equi­ty avail­abil­i­ty, we are well versed at short time peri­ods for iden­ti­fi­ca­tion of replace­ment prop­er­ties.

In part Five we will cov­er tax items to bring up with your tax pro­fes­sion­al.  We do not pro­vide tax advice. The ques­tions and items are fre­quent­ly asked ques­tions from investors.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your §1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC §1031 Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.