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If you’re thinking of investing and have heard of a DST 1031 exchange, it can be confusing to understand what it all means. In this post, we’ll explain all of the ins and outs of a DST 1031 exchange and break it down for you. Let’s start with the basics.
What does DST stand for?
DST is an acronym meaning Delaware Statutory Trust. Most programs are offered via securities dealers or brokers with sponsorship by a national real estate company. Typically, investors who use DSTs are not big real estate investors. They might have a house or two that they rent, a single multifamily property, or a small retail center or office building, but real estate isn’t their main income source. When an investor has a small portfolio like this, it usually means they have to actively manage a lot themselves and, once they reach retirement age, they look for other options. These often ‘baby boomer’ investors look to cash their real estate investments in with tax deferral. But, there’s little point in swapping one active management property with another, which is where the DST 1031 exchange comes in.
When were DSTs created?
Before the recession in 2007, most real estate fractional-ownership programs were TICs or Tenants in Common. However, the recession highlighted deficiencies in this structure. With up to 35 different owners all having to be underwritten separately by the lender and having to agree to changes unanimously, TICs were cumbersome, risky, and expensive.
Before the recession hit, DSTs were in their early stages, and only a few sponsors were offering them. However, after the credit crisis, almost all sponsors use the Delaware Statutory Trust structure exclusively. From their creation in 2004 until 2018, there was around $20 billion raised in DSTs.
According to statistics, in 2002, there were just 14 sponsors, 45 active programs and $356.6 million invested. In 2020, there were 40 sponsors, 170 active programs and $3.1 billion in investments. The biggest year for DSTs was in 2006 when there were 71 sponsors, 341 active programs and $3.6 billion in investments.
DST 1031 exchanges and why they dominate the real estate market
With a DST, investors are passive, so they are not active managers of their real estate. What’s more, compared to the Tenants in Common structure, the DST is cheaper and simpler. The trustee of the Delaware Statutory Trust is the only one to receive a loan from the lender. Other investors don’t. Also, in a DST, one investor’s actions will never threaten another investor since there isn’t a co-ownership agreement like there is in a TIC.
Types of property involved in DST 1031 exchanges
According to the 2021 Mountain Dell Consulting report, around 51% of DST properties are multifamily properties. The next highest share is retail, which boasts 15.64% of properties, and in third place is self-storage, which is a relatively new specialty to the investment sector.
Are there any other uses of DST 1031 exchanges?
Yes, it’s not just baby boomer retirees, more and more other investors are turning to DST 1031 exchanges for their benefits. Most real estate investors aren’t really in the business and don’t have access to replacement properties or resources. DST 1031 exchanges are useful when a seller or exchanger is struggling to find a replacement property, they can’t place all of the proceeds from their sale into a replacement or just want a backup.
DST 1031 exchanges final thoughts
Investors and advisors have become more and more comfortable with DST 1031 exchanges over the years. They have many positives for investors and allow them to be passive owners, have a cash flow that is predictable and means they can meet their tax deferral goals.
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