DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells

When Robert Chen first invested $500,000 in a Delaware statutory trust (DST) that owned a portfolio of Class A industrial properties in Phoenix, he understood the basics of the deal: strong sponsor, solid properties, predictable 6.2% distributions.

But he also understood that his real payday — or potential disappointment — would come not from the monthly checks, but from what happened five years later, when the trust decided to sell.

Robert received a notice that would determine whether his DST investment was a home run or a strikeout: The trustee was recommending the sale of the entire portfolio.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The buyer? A major institutional investor offering $47 million for properties the trust had purchased for $38 million five years earlier. For Robert, this meant his $500,000 investment was about to become $618,400 — a respectable 4.7% annual return on top of the distributions he'd already received.

But here's where DST investing gets interesting: Robert's exit experience was just one of several possible outcomes. Understanding these scenarios before you invest can mean the difference between building wealth and learning expensive lessons.

The DST exit menu: Your options when the party ends

Unlike owning a stock that you can sell on Tuesday morning if you wake up feeling bearish, DST investors are along for the ride until the trustee decides it's time to exit.

This lack of liquidity control is often cited as DST investing's biggest drawback, but sophisticated investors understand this constraint can actually work in their favor — if they know how it works.

DST exits typically fall into four categories, each with dramatically different implications for investors.

The strategic sale represents the gold standard of DST exits. This is what happened to Robert — a planned disposition to an institutional buyer after a successful hold period.

The sponsor has executed their business plan, optimized the properties and found a buyer willing to pay a premium for stabilized, professionally managed assets.

These exits often generate the most satisfying returns because they combine appreciation with the full realization of the sponsor's value-add strategy.

The distressed sale sits at the opposite end of the spectrum. Consider the case of Maria Gonzalez, who invested $300,000 in a DST that owned retail properties across suburban Texas in 2019.

The pandemic devastated the portfolio's anchor tenants, and by 2022, the trust was facing a liquidity crisis. Rather than continue to bleed cash, the trustee orchestrated a sale to a distressed buyer for significantly less than the original purchase price.

Maria recovered only $180,000 of her initial investment — a painful reminder that DST investing, despite its passive nature, still carries real estate risk.

The refinancing exit offers a middle path that many investors don't initially consider.

When David Park invested in a DST owning multifamily properties in Austin, he expected either a sale or continued ownership.

Instead, three years into the investment, the sponsor refinanced the properties, pulling out enough cash to return David's entire original investment while maintaining ownership of the appreciating assets.

David essentially got his money back while retaining his pro-rata share of properties that continued generating distributions and appreciation potential.

The 1031 roll-forward represents perhaps the most sophisticated exit strategy, though it's not available in all DST structures.

Some sponsors structure their trusts to facilitate follow-on 1031 exchanges, allowing investors to roll their proceeds into subsequent DST investments without triggering immediate tax consequences.

This strategy appeals particularly to investors who want to maintain their tax-deferred status while accessing different property types or geographic markets.

Reading the exit tea leaves: Which signals matter

Experienced DST investors learn to read the signals that indicate which type of exit might be approaching. The monthly investor reports that many passive investors ignore contain crucial intelligence about the likely exit scenario.

Occupancy trends tell a story. When Jennifer Walsh noticed her DST's office properties in Denver were maintaining 95%-plus occupancy, while similar properties in the sponsor's reports were struggling, she correctly anticipated her trust would likely attract premium buyer interest.

Conversely, when occupancy rates consistently lag behind market averages, it often signals potential distress that could lead to suboptimal exit pricing.

Capital expenditure patterns provide another crucial indicator. DSTs that consistently invest in property improvements and tenant improvements are typically preparing for strategic exits that will maximize value.

Properties in which capital expenditures are deferred or minimized might be heading toward quicker, potentially less profitable exits.

The broader economic context matters enormously. Interest rate environments, institutional capital availability and sector-specific trends all influence exit timing and buyer appetite.

Smart DST investors don't just focus on their individual properties — they monitor the institutional real estate market that will ultimately determine their exit opportunities.

The tax implications: Your exit strategy's hidden complexity

DST exits involve tax implications that can significantly impact net returns, and these vary dramatically, depending on the exit structure and the investor's overall tax situation. Understanding these implications before investing can help investors make better decisions about position sizing and portfolio allocation.

When Michael Torres received his distribution from a successful DST sale, he was surprised to discover that a portion of his gain was subject to depreciation recapture at ordinary income rates rather than the more favorable capital gains treatment he expected.

The DST had been aggressively depreciating the properties, and that depreciation had to be "recaptured" upon sale.

For Torres, whose ordinary income tax rate was significantly higher than his capital gains rate, this detail reduced his after-tax returns more than he had anticipated.

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The timing of DST exits can also create tax planning opportunities or challenges.

Investors who receive large distributions in high-income years might wish they could defer the gains, while those experiencing lower-income years might welcome the additional income.

Unfortunately, DST investors have virtually no control over this timing, making it crucial to consider how potential exits might fit into broader tax planning strategies.

The reinvestment dilemma: What comes after the exit?

One of the most overlooked aspects of DST exit planning involves what happens to the proceeds after the sale.

Unlike direct real estate ownership, in which investors can immediately execute 1031 exchanges into replacement properties, DST exits often provide cash distributions that might not be suitable for immediate reinvestment into similar opportunities.

Sarah Mitchell faced this challenge when her DST investment returned $750,000 after a successful sale. The distribution arrived in November, just as most DST sponsors were completing their annual fundraising cycles.

The best new DST opportunities wouldn't be available until the following spring, leaving Sarah with a temporary reinvestment gap that required careful planning to optimize her overall portfolio allocation.

Some sophisticated investors address this challenge by maintaining positions in multiple DSTs with staggered exit timelines, creating a more consistent flow of investment opportunities.

Others coordinate with their sponsors to gain early access to follow-on investment opportunities, though this strategy requires maintaining strong relationships with active DST sponsors.

Due diligence: The exit strategy you should evaluate before you enter

The most successful DST investors spend as much time evaluating the likely exit strategy as they do analyzing the properties themselves.

This forward-looking approach requires understanding not just what the sponsor plans to do, but which market conditions and sponsor capabilities will likely allow them to execute.

Sponsor track records become crucial in this analysis.

Sponsors with histories of successful exits across multiple market cycles demonstrate the operational expertise and market relationships necessary to optimize exit timing and buyer selection.

Conversely, sponsors with limited exit experience or poor historical performance might struggle to maximize value when the time comes to sell.

The business plan timeline provides another critical evaluation criterion.

DSTs with clear, achievable value-add strategies and realistic exit timelines allow investors to better predict when and how their capital will be returned.

Plans that seem overly optimistic or vague often signal potential challenges in execution and exit.

Your financial team should be experienced enough to differentiate between the likelihood of the vastly different scenarios you could encounter.

The bottom line: Exits define returns

DST investing success ultimately depends not on the quality of the entrance, but on the quality of the exit.

The monthly distributions that attract many investors typically represent only a portion of total returns — the exit event determines whether the investment generates truly attractive risk-adjusted returns.

Understanding the range of possible exit scenarios, their likelihood given current market conditions and their implications for your broader investment strategy is essential for DST investment success.

The passive nature of DST investing doesn't mean passive evaluation — it means focusing your analysis on the important factors that drive long-term returns.

For investors such as Robert Chen, who took the time to understand not just what he was buying but how and when it might be sold. DST exits represent the successful completion of a well-planned investment strategy.

For those who focus only on current yield without considering exit implications, the eventual sale can bring unwelcome surprises that undermine their overall investment objectives.

The lesson? In DST investing, the exit strategy isn't just part of the plan — it is the plan.

When looking for a financial team to guide you in your DST investment, be sure to pick one sophisticated enough not to simply chase yield, but to understand the DST exit is the critical wealth-building event that must drive the investment selection from day one.

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