We have some investment property that is aging and needs more care and attention and we are willing to invest. We are currently thinking of trying to do a 1031 exchange and/or Delaware Statutory Trust (DST) as a way of no longer having landlord duties. We are interested in folks with experience with DSTs and learning about pros & cons without the hard sell. We understand there are a lot of fees and you have NO control of the property and are locked in for some years.
Great question!
Had heard of 1031 Starker but I didn’t know DST available.
I see that “One main disadvantage in DST ownership is the loss of control on the management of the property, since managers of the DST will make all small and large decisions. Another disadvantage is the investment in an illiquid asset. As is true for any real estate investment, an interest in a DST is illiquid and an investor cannot sell his or her interest in a secondary market such as the stock exchange. There are also fees and expenses incurred in purchasing the interest, so investors need to evaluate each DST option. Since real estate is involved, there’s also a risk of potential loss in value of the property, loss of tenants which can lead to insufficient cash flow, and a potential for a foreclosure on the property.”
( from cbiz.com)
I’ve also read due diligence must be done with regard to choosing intermediary, and also checking for state regulation.
And, “If the DST contains multiple assets please note it may be necessary to file a tax return in each State the DST has properties.“ ( from 1031exchange.com)
Why don’t you just sell?
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Agree. If you don’t want to manage the property, sell it. The transactional frictional costs and illiquidity are unlikely to offset any possible tax advantage (which for the most part is a deferral of income/capex recognition). If you want to maintain RE exposure on a passive basis, there are other liquid investments available.
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@HImom, you are absolutely right about your concerns. Don’t do it! High fees and you are locked in for an unknown number of years.
We did this with a property worth about 300K four years ago. REALLY tired of being landlords, and it sounded attractive to just 1031 exchange it into a DST, getting that monthly payment and not paying the long term capital gains taxes right away when we sold it. Well. Everybody gets their cut on this. The law firm that did the 1031 exchange got about 1K, which was reasonable, no problem. The entity that got us into the DST got 4% right off the top, which apparently is a pretty good deal, as some DSTs cost much more to get into. But it was not advertised, and more than expected.
Now we have no idea when we have access to our money. Didn’t think we’d need it for a long time, but things changed and we sure would have liked to have it as opposed to withdrawing from our 401K. The monthly payments are nice (they pay about 5.16% annually, which is taxed), but we could have gotten that rate from a money market, with access to our money. We have no idea how much (or if) it is appreciating. This is definitely not a scam, but it was a mistake. We wondered if we were supposed to file state taxes in the four states the properties are in, but I think the amount we make attributed to each state is lower than the limit requires. Otherwise, four more tax returns? Ugh.
I totally get not wanting to do the landlord thing anymore, so don’t. Sell the property, pay the taxes, at worst 20% capital gains tax. Then if you still want the diversification, put it in REITs or something similar. You feel like, hey, I’m still staying in real estate, but in a painless way with the DST, but I sure wish we would have just sold and paid the taxes. The reality is, if you weren’t trying to delay paying taxes, would you search out a DST, lock in your money and pay high fees? No way.
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Thanks @busdriver11 for your feedback. All the fees are definitely off putting, as is the total lack of control. I’ve asked our CPA what our basis is in the properties and am still awaiting an answer so we can figure out the cost of cashing out and alternatives as well.
We did a 1031 once before and it went quite smoothly. We sold 2 investments and bought a house, taking on a mortgage. We may do this again—trading the rentals for another investment property that is in better shape.
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It is more than cap gains. There is also depreciation recapture tax. The tax bite can be really substantial.
Yes, thanks for that reality check. I’m pretty sure we won’t have recapture but we are still waiting for CPA to weigh in and let us know basis and will ask him about recapture.
But it was also a pretty substantial deduction too.
I have owned several investment properties and have been selling them off (one a year) except for a commercial property. I’d rather pay the high taxes (we’re in CA) than reinvesting in DSTs. I don’t trust these RE partnerships as they have many ways of making your initial investment unavailable for decades, possibly even after I pass. I prefer to see my investment (net expenses, taxes) return to me immediately especially at my age, past retirement.
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Here’s another problem with the DST, it’s not knowing when it will go full cycle (that’s when they sell off the assets and you can get your money back or 1031 into something else). When I asked them when my DST would go full cycle, all I learned was that this kind of DST usually does in 4-6 years. Now we’re at the four year point, and we’re trying to figure out how much to take out of our 401k to remain in the 24% tax bracket. If all of a sudden we find out 2024 is the year the DST goes full cycle, there’s a big chunk added to our income. Can we stay in the 15% long term gains tax bracket? No idea, and I don’t want to have to plan every year like we’re going to get this money.
It makes my tax planning really difficult.
Thanks @busdriver11 ! You and others have convinced me that DSTs have just too many unknowns for me. I will really try to figure out 1031s instead.
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We did a 1031 exchange about 5 years ago. The attorney and the exchange agent made it a piece of cake. The only stressful part was identifying our exchange properties within the 45 day window. We were exchanging one rental in WA for 2 rentals in MO. I ended up putting 5 or 6 properties on the identification form which gave me some extra time to get offers accepted and loans approved. It was a good thing because we pulled out of one deal based on the inspection so we just moved on to the next property on our list.
I never did understand the rationale for the 45 day property ID though. Seemed to me that it would simplify things for everyone to just have a 6 month deadline on closing on the replacement properties.
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Glad we convinced you! Unknowns that I didn’t even think about, like today I contacted the DST entity again, and they still don’t know when it will go full cycle (I talked to them a year ago). So now since I have no idea of whether it would be this year or not, I’m thinking we’re either going to have to borrow from our HELOC if we need more cash, or draw from our Roth (which we were avoiding). We never considered this issue four years ago when we got into it. Not only no access to your money, but no idea of when you’ll get it!
The house we live in was a 1031 in the 1980s. We sold 2 investments to buy the house plus needed to take on a mortgage. We sold the two rentals quickly and only wanted this one house. I believe we made the only offer and at full asking price.
We rented it and lived in a rental apartment. The tenant lost his job and he and the family had to move to live with wife’s family so we installed hardwood flooring and moved in and gave up the apartment we had been living in.
As I remember it, the 1031 wasn’t that difficult. The properties we sold were nice and sold right away, after we painted and recarpeted and repaired one cupboard. The house we bought only needed a new roof, appliances and hardwood floors.
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