If you are looking to harness the benefits that come with a Delaware Statutory Trust (DST), then finding the right DST properties is vital. Whether you are looking to diversify your investment portfolio, complete a 1031 exchange, or even generate income, the right DST properties can help you achieve the above and lots more.
What are DST Properties?
DST properties are real properties held in an investment trust in which investors can purchase a fractional ownership interest in the properties owned by the trust. Typically, DST properties are usually investment-grade commercial real estate held for trade or investment purposes.
For any questions regarding Delaware Statutory Trusts (DST) and 1031 Exchanges, please reach out to us at Sera Capital today for assistance.
How to Identify and Compare DST Properties in 1031 Exchange
One of the upsides to investing in DSTs for 1031 exchange purposes is that DSTs (if structured properly) are considered direct investments in real estate and are eligible for 1031 tax-deferral treatment. However, if the DST properties are not correctly identified during a 1031 exchange, it may lead to the failure of the entire exchange process.
To do a successful 1031 Exchange, exchangers must identify replacement DST properties within 45 calendar days after the sale of their relinquished property. Typically, the IRS requires exchangers to adhere to the following identification rules:
- Three Property Rule: The exchanger can identify one, two, or three properties regardless of the value of the property(ies) identified;
- 200% Rule: The exchanger can identify as many properties as they would like, so long as the aggregate value does not exceed 200% of the value of the relinquished property they are selling. For example, if the exchanger sells a property for $500k, they can identify properties with an aggregate value of $1M or less.
- 95% Rule: The exchanger can identify as many properties as they would like for as much value as they acquire 95% of the specified property value. For example, if the exchanger identifies 10 properties, each valued at $200K. If the exchanger only closes on 9 of them, the entire exchange fails.
Choosing the right DST properties plays a considerable role in the success or failure of any 1031 exchange strategy. However, choosing the right DST properties can be a huge challenge due to the millions of DST properties scattered around the country. To save you from the risks, you must learn how to compare DST properties and their offerings.
Step 1: Find out the overall loan to value ratio (LTV)
Step 2: Ask the sponsor how much of the loan payments are interest only
Step 3: Find out the debt-service coverage ratio (DSCR)
Step 4: Consider the asset and its production expectations.
You should always carefully examine the DST Private Placement Memorandum (PPM) before making any investment.
We understand that each investor will have different priorities that will affect how they evaluate 1031 exchange DST properties. If you have any questions regarding DST investments and DST properties, our team of experienced DST advisors at Sera Capital is available to help you. Don’t hesitate to get in touch with us today to get started.