5 Types of Investors Who Should NOT Do a Delaware Statutory Trust
Delaware Statutory Trusts, or DSTs, solve a lot of problems for real estate investors interested in a 1031 exchange … but they’re not right for everyone.
![Someone pushes a red button that is labeled "No!"](https://cdn.mos.cms.futurecdn.net/QAuM2U34at3PjZfeFRgrkS-415-80.jpg)
If you have found this article, you likely understand the many benefits that exist for real estate investors who exchange their property for DST, Delaware Statutory Trust fractionalized replacement interests.
Since 2004, when DSTs qualified for the 1031 exchange rules, those benefits include saving vast amounts of tax via the 1031 Exchange, preservation of the “step-up in basis” rule, moving away from loan guarantees, cash calls and the three T’s: Tenants, Toilets and Trash.
Delaware Statutory Trust 1031 investors buy into institutional-grade multifamily apartments, distribution facilities, medical buildings, office space, retail, national brand hotels, senior living, student housing, and storage portfolios. Subject properties are commonly over $100 million and far out of reach for smaller “do it all yourself” individual investors.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The peace of mind of a tax-advantaged cash flow distribution each month and the removal of all the headaches that go along with managing real estate make the DST a fabulous option for many real estate investors.
Although many people feel like the Delaware Statutory Trust may be the greatest thing since sliced bread, we would caution that rarely is one thing the best idea for everyone. The following is a list of five types of investors who should probably avoid the DST option.
1. Investors who are not yet accredited
Investors who have not yet built enough wealth and/or equity are prohibited from entering into a DST arraignment via Securities Regulation D, under the Accredited Investor Rules. This rule states that to invest in private placement investments one must have a net worth of over $1 million excluding one’s primary residence or income requirements of at least $200,000 per year (for singles, or $300,000 for couples filing jointly) for the last two years.
For a greater explanation of those requirements, I highly recommend you sign up for my course, Master The 1031 Exchange. Below is a quick taste of what you can expect.
2. Younger wealth builders
Younger investors who are seeking a higher risk/return profile might not yet be ready for a DST solution.
Young wealth builders might be in a greater position to take on substantial risk and in turn reap the benefits of higher risk returns than what a more seasoned investor might be willing to do. Should those risks cause the younger investor to lose income or equity, the younger investor usually has more time to overcome such losses.
Generally, most DST investors tend to be more seasoned investors who have a few battle scars and life experience than that of younger investors.
3. Do-it-yourself types
Some investors have a personal preference for finding tenants, negotiating leases, managing the books and records ranging from property taxes, rent rolls, bank loans, lease agreements, tenant issues, property repairs and so on.
A DST is a more passive investment where all of those things are done by institutional investment grade real estate firms. If you are the sort of person who would really miss those things and if you find significance in those activities, you might find the DST solution less appealing.
4. Anyone with a high need for liquidity
Investors are people and therefore very different from one another. If a real estate investor has a high need for liquidity, then the investor might want to avoid real estate altogether, and to that end, a 1031 exchange might not be the best idea for an investor who needs more access to their cash.
A straight sale of your real estate where you recognize capital gains might be what is required in this instance. This would allow the investor to invest in more traditional stock and bond portfolios that can be turned into cash in short order.
Investors’ high need for liquidity might be due to the need for raising cash for a larger leveraged deal, the anticipation of a divorce, health concerns, speculation about the economy, or for many other possible reasons.
Again, the DST is an ideal solution for many investors, not ALL investors.
5. Developers and construction company owners
Someone who owns a construction and/or development company might want to use a 1031 exchange where they could use their construction company to build their new replacement property, therefore, benefiting two of their interests.
Properties that are “to be built” generally will have a higher risk-return profile as well and may be better suited for a younger investor. Moreover, the individual may have a keen skillset and ability around a certain and specific type of property, such as car washes, storage facilities, dentist and vet clinics, retail, etc.
DST offerings are offered through registered investment advisers.
Accredited investors can view multiple DST offerings on my company's site as well gain as access to:
- A knowledge center
- Videos
- Master The 1031 Exchange masterclass
- Referrals to CPAs and Qualified Intermediaries
- FAQs
- and more.
If you wish to speak with our team at Provident 1031, call us at 281-466-4843.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Daniel Goodwin is a Kiplinger's contributor on various financial planning topics and has also been featured in U.S. News and World Report, FOX 26 News, Business Management Daily and BankRate Inc. He is the author of the book Live Smart - Retire Rich and is the Masterclass Instructor of a 1031 DST Masterclass at www.Provident1031.com. Daniel regularly gives back to his community by serving as a mentor at the Sam Houston State University College of Business. He is the Chief Investment Strategist at Provident Wealth Advisors, a Registered Investment Advisory firm in The Woodlands, Texas. Daniel's professional licenses include Series 65, 6, 63 and 22. Daniel’s gift is making the complex simple and encouraging families to take actionable steps today to pursue their financial goals of tomorrow.
-
Eight Key Steps to Take When Investing in the Stock Market
The stock market can be a confusing place for beginners, but it doesn't have to be.
By Kiplinger Advisor Collective Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published