Multifamily into a Delaware Statutory Trust (“DST”)
842 REED AVE. 92109 – 8 UNITS (DOWN-LEG)
INTO A DELAWARE STATUTORY TRUST (DST) (UP-LEG)
In Q1 of 2020, a longtime owner/operator of an eight unit multifamily property (Down-Leg/Relinquished Property) at 842 Reed Avenue in Pacific Beach, was tired of the owner/manager role including repairs and tenant issues that would come up, as well as the increasingly burdensome political climate for operating multifamily investments in California, so opted to trade out of 842 Reed Avenue, and into several Delaware Statutory Trusts (“DSTs”) in various states, including Florida, Nevada and Georgia, as his exchange (Up-Leg) property(ies), as his preferred exit strategy.
The Down-Leg property sold for $3,335,000. Seller, a 50/50 partner in the property, spread out his portion of the proceeds among several $300K or so interests in DST investments for diversification, and says that these investments now (2/17/22) continue to pay out a blended return of over 5% from equity, which he receives in monthly distributions. This is especially nice when you consider a lot of that is tax free money, resulting from the newly adjusted depreciable basis, and in some cases debt on these DST property(ies), which serve to lower the investor’s taxable income, thus improving the after tax income. The properties that Seller is now invested in, via his interests in these DSTs, include several institutional grade multifamily, senior housing, and self-storage properties in more conservative southeastern states, mostly with no state income tax. Seller says he does not miss the calls from tenants due to a variety of issues that would come up, and instead is just enjoying the free time and passive income, which he says is considerably more than they were making while operating the apartments. Since this initial 1031 exchange into DSTs, this Seller has sold three subsequent Pacific Beach and North Park-area multifamily properties, trading into more DSTs.
Delaware Statutory Trusts or DSTs, are corporate-structured ownership entities that derive their main source of revenue via acquisitions, operations, and dispositions of institutional grade income producing properties, which are typically so large that most wealthy individuals could not afford them on their own. DSTs pools investments from several limited partners, similar to a REIT, in order to acquire these larger assets. The DSTs have professional management distribute the monthly returns to the investment partners, according to their respective shares in a particular DST. The life-cycle of each DST is different, yet holding periods from 3-5 years are common. When the DST sponsor decides it is time to sell, then the investor has another decision to make, namely: whether to re-invest their equity position from the property into another DST via a 1031 Exchange; whether to reinvest that equity into another form of ‘like-kind’ property via a 1031 Exchange; or cash out and pay the capital gains taxes.