DST Exit Strategies: What Investors Can Expect at Sale

Most investors focus heav­i­ly on income when eval­u­at­ing a Delaware Statu­to­ry Trust (DST). For investors, uti­liz­ing a DST as a replace­ment for a 1031 tax defer­ral may be the pri­ma­ry goal. How­ev­er, what hap­pens at the end of the invest­ment is just as impor­tant. The end of the invest­ment may be ref­er­enced as a DST going “full cycle”.

May 27, 2026

By Al DiNi­co­la, AIF®
Pri­vate Fund Advi­sor
DST 1031 Spe­cial­ist
Fidu­cia­ry Cap­i­tal Man­age­ment, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Intro­duc­tion

Under­stand­ing DST exit strate­gies helps you plan for liq­uid­i­ty, tax­es, and your next move. The investors seek­ing to uti­lize anoth­er 1031 exchange may have addi­tion­al need for extend­ed knowl­edge.

In this arti­cle we will review a few most request­ed top­ics and ques­tions. The first may be who makes the deci­sion to exit and how DSTs are typ­i­cal­ly exit­ed.  Once the exit sales price is estab­lished what investors receive at sale.  What are the tax impli­ca­tions and how are they han­dled. How much notice do you receive and how to plan ahead for a smooth tran­si­tion.

How DST Invest­ments Typ­i­cal­ly End

DSTs are not per­pet­u­al invest­ments. There is a defined life­cy­cle. Struc­tural­ly they usu­al­ly have a time frame between 5 to 10 years.  This depends on the busi­ness plan. There are plans that may have an ear­li­er exit plan espe­cial­ly if mov­ing to a §721 UPREIT or a land DST that will be tak­en out by a devel­op­ment. How­ev­er, at some point, the prop­er­ty is sold. This is the time when investors receive their cap­i­tal back (plus or minus any gains or loss­es).

Inter­nal Link:
What Is a Delaware Statu­to­ry Trust (DST)? — DST Edu­ca­tion and Mar­ket News

Typ­i­cal DST Exit Strate­gies

There are sev­er­al ways a DST invest­ment may reach its con­clu­sion.

1. Prop­er­ty Sale (Most Com­mon)

The most com­mon Delaware Statu­to­ry Trust sale sce­nario is a full dis­po­si­tion of the prop­er­ty. This is sim­i­lar to any real estate sale. Here is what hap­pens. The spon­sor sells the assets. If there is a mort­gage on the prop­er­ty, the debt is paid off. The remain­ing pro­ceeds are dis­trib­uted to investors based on their per­cent­age of own­er­ship. Ww will dive deep­er in anoth­er sec­tion. This is the pri­ma­ry out­come investors should expect when eval­u­at­ing DST exit options explained.

2. Refi­nance or Recap­i­tal­iza­tion

By struc­ture a DST may not refi­nance the prop­er­ty (con­sid­ered one of the sev­en dead­ly sins). In most real estate hold­ings, a new loan replaces the exist­ing one. There was a brief peri­od dur­ing COVID where a few excep­tions were made enabling DST to raise addi­tion­al cap­i­tal. Very few did actu­al­ly exer­cise that exemp­tion.  How­ev­er, the only method we under­stand for a DST to attempt to refi­nance is to spring to an LLC. This may cause some seri­ous tax impli­ca­tions for investors. DST struc­tures are gen­er­al­ly more restric­tive than oth­er real estate vehi­cles, so refi­nanc­ing options may be nonex­is­tent com­pared to direct own­er­ship.

Lim­i­ta­tions on a DST Part 1 – The Sev­en Dead­ly Sins — DST Edu­ca­tion and Mar­ket News

3. Spon­sor Buy­out

Occa­sion­al­ly, the spon­sor may pur­chase investor inter­ests direct­ly. Spon­sors may tran­si­tion the prop­er­ty into anoth­er own­er­ship struc­ture or offer­ing.  For exam­ple, a spon­sor may struc­ture a land DST that will be pack­aged for a future sale to a nation­al home builder, mul­ti­fam­i­ly devel­op­er or assist­ed liv­ing spon­sor. In the past this has been less com­mon. How­ev­er, recent­ly there are a few options for this struc­ture that may pro­vide ear­ly liq­uid­i­ty and a sim­pli­fied exit in 2–4 years vs. 7–10 years. We will cov­er the §721 options lat­er.

What Investors Receive at Exit

There is no pri­or­i­ty posi­tion based on investors with a larg­er per­cent­age of own­er­ship. Typ­i­cal­ly, the sell­ing price is based on the over­all prop­er­ty per­for­mance. 

1. Return of Prin­ci­pal

Investors typ­i­cal­ly receive their orig­i­nal invest­ment (sub­ject to per­for­mance).

2. Prof­it (or Loss)

The returns depend on any prop­er­ty appre­ci­a­tion. There may be income gen­er­at­ed dur­ing the hold peri­od. (There are DST designed with high lever­age and increased tax advan­tages where all dis­tri­b­u­tion pays down the debt).  If the DST had lever­age, there may be an amor­tized loan that pay down the debt over time.

If the prop­er­ty per­formed well like any real estate invest­ment, the investors receive gains. The oppo­site is also true if per­for­mance was weak­er the returns may be low­er or, in some cas­es, result in a loss.

Inter­nal Link:
What Hap­pens If a DST Under­per­forms? A Real­is­tic Guide for Investors — DST Edu­ca­tion and Mar­ket News

3. Debt Pay­off Impact

Before dis­tri­b­u­tions the loan is ful­ly repaid. This means lever­age plays a key role in final returns. For investors exe­cut­ing a future 1031 exchange the per­cent­age of debt being paid off will need to be replaced in the next exchange (or with addi­tion­al cash).

Inter­nal Link:
Debt, Lever­age, and Non-Recourse Loans in DSTs: What Every Investor Must Under­stand — DST Edu­ca­tion and Mar­ket News

Tax Impli­ca­tions upon Sale

One of the biggest advan­tages of DST invest­ing is the abil­i­ty to con­tin­ue tax defer­ral.

Option 1: Cash Out (Tax­able Event)

If you take the pro­ceeds cap­i­tal gains tax­es apply. In addi­tion, depre­ci­a­tion recap­ture may be trig­gered. Investors need to under­stand (with the assis­tance of a CPA) the over­all impli­ca­tions. There is a step up in basis in the event the investor dies, and the DST is part of the estate. We are not pro­vid­ing tax advice.  

Option 2: Con­tin­ue a 1031 Exchange

Many investors choose to rein­vest into anoth­er DST or poten­tial­ly into a tra­di­tion­al real estate prop­er­ty. All IRC sec­tion 1031 guide­lines apply with iden­ti­fi­ca­tion peri­ods, clos­ing time as well as finan­cial replace­ment require­ments.

The Ben­e­fits include Con­tin­ue tax defer­ral, Main­tain­ing invest­ment momen­tum, and more invest­ment cap­i­tal preser­va­tion. This is a key part of 1031 exchange con­tin­u­a­tion at DST sale.

Option 3 (if applic­a­ble): exer­cise a 721 UPREIT.

Over the past few years anoth­er exit strat­e­gy has been pre­sent­ed in a vari­ety of DST offer­ings. This is a Sec­tion 721 UPREIT. The dst investor con­tributes their inter­est in the DST (real estate inter­est) into a Real Estate Invest­ment Trust (REIT). Cer­tain DST have includ­ed this as an option­al exit while oth­ers have a manda­to­ry UPREIT as part of the offer­ing.  WE have writ­ten exten­sive­ly on the ben­e­fits and draw­backs. One of the ben­e­fits is becom­ing part of a larg­er diver­si­fied invest­ment strat­e­gy One of the major draw­backs is there is no longer the abil­i­ty to do future 1031 exchanges.

IRC Sec­tion 721 Exchange Two Roads to Trav­el — DST Edu­ca­tion and Mar­ket News

Tim­ing: When Do DSTs Typ­i­cal­ly Sell?

Most DSTs have pro­ject­ed hold peri­ods. The tim­ing is not guar­an­teed.

There are a host of Fac­tors that may influ­ence tim­ing. A few may be the over­all market con­di­tions, cur­rent inter­est rates (for poten­tial buy­ers). The prop­er­ty per­for­mance and the buy­er demand may deter­mine the over­all suc­cess of the prop­er­ty.  

A strong mar­ket may lead to an ear­li­er sale, while weak­er con­di­tions may delay the exit. Since the increase in inter­est rates the time peri­od for a suc­cess­ful sale has been extend­ed.

In most sit­u­a­tions this may be a cap­i­tal­iza­tion rate (CAP RATE) based on the net oper­at­ing income (NOI). Here is a brief overview. IF the NOI of a prop­er­ty is $1 Mil­lion and the mar­ket cap rate is 5 (5%) the val­u­a­tion of the prop­er­ty may be $20M ($1M/5%). NOI is pri­or to debt ser­vice and a method­ol­o­gy for buy­ers to estab­lish val­u­a­tion or price. There is an inverse rela­tion­ship with cap rates.  A rise in cap rates equates to a drop in val­u­a­tion.  In the same exam­ple a cap rate of 5.25 (5.25%) may drop the val­u­a­tion by $1M. If the cap rate drops to 4.75% there may be an increase in val­u­a­tion of $1M.   When we eval­u­ate a DST, we look at acqui­si­tion cap rates (as well as ful­ly loaded cap rates) and inquire how spon­sors will increase NOI to increase val­u­a­tion.

How to Plan for a DST Exit

Smart DST liq­uid­i­ty plan­ning starts before you invest.

1. Review of the Sponsor’s Exit Track Record would be a start­ing point when review­ing the PPM. We eval­u­ate any suc­cess­ful exits from sim­i­lar prop­er­ties. WE review pro­ject­ed time­lines.  We want to estab­lish actu­al returns com­pared to expec­ta­tions.

2. Under­stand the Expect­ed Hold Peri­od

Know whether the strat­e­gy is: Short-term (5 years) Medi­um-term (7–10 years). Investor suit­abil­i­ty is very impor­tant. We want to ensure investors plan their finan­cial needs accord­ing­ly.

3. Coor­di­nate With Your CPA

We do not pro­vide tax advice and stress that investors speak with their CPA before the sale.  Investors should eval­u­ate tax impli­ca­tions. If there is anoth­er 1031 exchange prepa­ra­tion for that event. There may also be a hid­den item with depre­ci­a­tion recap­ture. This is com­pound­ed when the investor moved into the DST with a car­ry for­ward basis and past depre­ci­a­tion.  

4. Plan Your Next Move Ear­ly                                           

If you intend to com­plete anoth­er 1031 exchange: You will still face the 45-day iden­ti­fi­ca­tion win­dow. Plan­ning ahead pre­vents rushed deci­sions espe­cial­ly if there is debt to be replaced.

Com­mon Mis­takes Investors Make

• Not Plan­ning for Tax­es- Fail­ing to pre­pare for a tax­able event can reduce net pro­ceeds sig­nif­i­cant­ly.
• Assum­ing Exact Exit Tim­ing- Mar­ket con­di­tions, not pro­jec­tions, dri­ve actu­al sale tim­ing. The spon­sor will dri­ve the tim­ing.
• Ignor­ing Debt Impact- Loan pay­off sig­nif­i­cant­ly affects final returns.
• Wait­ing Too Long to Plan a 1031 Exchange- You must act quick­ly once the sale occurs.

Final Thoughts: Under­stand­ing Your DST Exit Strat­e­gy

A suc­cess­ful DST invest­ment isn’t just about income. A suc­cess­ful DST is also about how and when you exit.

Under­stand­ing DST exit strate­gies allows you to:

• Plan for liq­uid­i­ty
• Man­age tax­es effec­tive­ly.
• Make smarter rein­vest­ment deci­sions.

Whether you choose to cash out or con­tin­ue your 1031 exchange, prepa­ra­tion is key.

By focus­ing on the spon­sor track record, mar­ket tim­ing, and tax strat­e­gy  you can turn your DST exit into a pow­er­ful finan­cial oppor­tu­ni­ty.

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 §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 or email adinicola@Fiduciarycm.com.

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