“John” called me on a Tuesday. He had just accepted an offer on a strip center he had owned for 26 years. He was happy about the price and miserable about everything else. He did not want to find another building. He did not want to sign another lease, chase another tenant or fix another roof. What he wanted, in his words, was to never get another midnight phone call about a toilet.Somebody had told him about a Delaware Statutory Trust (DST). He did not know what it was. He only knew it was supposed to make his problem disappear. By the end of our call, I told him a DST might be exactly right for him. I also told him that if one detail had been different, it would have been exactly wrong.That is the honest truth about DSTs. They are a wonderful tool for the right person and a poor fit for the wrong one. The trouble is that most of the people selling them only describe the right person. So before you exchange a dime, sit with these five questions.1. Are you actually done being a landlord?Not tired. Done.There is a difference. Tired is Saturday morning after a bad week. Done is a decision. You give up control completely. The sponsor makes every decision about the building, the financing, the tenants and the eventual sale. You collect monthly distributions and you wait. You cannot vote on a roof. You cannot fire the manager. You cannot decide to sell next spring because you found something better.About Adviser IntelThe author of this article is a participant in Kiplinger’s Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.For the man with the strip center, that loss of control was the entire point. He had been the manager for 26 years and he was finished. For the next person, that same loss of control is a cage. If part of you still loves the hunt, the negotiation, the ownership, a DST will frustrate you. Be honest about which person you are.2. Do you meet the DST accredited investor requirements?Most DSTs are offered through private placements generally limited to accredited investors. The current thresholds are a net worth above $1 million not counting your home, or income above $200,000 a year as an individual, or $300,000 jointly with your spouse, in each of the last two years with the expectation of the same this year.Most people selling an appreciated property clear this bar without thinking about it. But you have to actually meet it and be able to document it. If you cannot, the door does not open and no adviser can open it for you.3. Is your money big enough to spread out, but not so big you should buy a building?Most DSTs set a minimum investment between $25,000 and $100,000, depending on the offering. The properties themselves are large, often $30 million to $100 million, which is how a single investor ends up owning a sliver of an apartment complex or a distribution center they could never buy alone.Here is the sweet spot. If your 1031 exchange proceeds are large enough to split across several DSTs, you get something a single replacement building can never give you: Diversification. You can own a piece of an apartment community in one state, a medical building in another and an industrial property in a third, all inside one tax-deferred exchange. One bad tenant no longer ruins your year.But there is a ceiling to the logic. If you are exchanging a very large sum and you genuinely enjoy ownership, buying your own replacement property may still be the better answer. A DST trades control for convenience. The more capital you have, the more that trade is worth examining rather than assuming.4. Do you understand DST illiquidity and are you at peace with it?This is the question people skip and the one that causes the most regret.A DST is not a stock. You cannot sell it next Tuesday because you changed your mind or because you need the cash. There is no real secondary market to speak of. Your money is committed until the sponsor sells the underlying property, which typically happens somewhere between five and 10 years out, on a timeline you do not control.If everything you are putting into the DST is money you will need to touch in the next few years, stop. This is the wrong vehicle. A DST is for capital you can leave alone. Before anyone exchanges, I want to see that the rest of their financial life is liquid enough that locking up this piece does not keep them awake at night.5. How does this fit your estate plan?This question matters because the answer can change the whole calculation, and most people never get to it.If the goal is income and simplicity for the rest of your own life, a DST can deliver both. But think one step further. Under current law, when you die, your heirs generally receive a basis adjustment that can eliminate the deferred capital gain for income tax purposes. The gain you carried for years does not have to pass to them as a tax bill. The DST interest transfers at its value on the day you die, and the embedded gain can be wiped clean.That single feature changes the math for a lot of families. A property you might have been afraid to sell because of the tax can be exchanged into a passive, diversified DST, held for income while you are alive, and then handed to your heirs without that gain following them. If your spouse or children are part of the plan, a DST is not just an exit. It is part of an estate strategy worth discussing with your adviser and your estate attorney before you commit.A word on DST investment risksDSTs draw their tax treatment from IRS Revenue Ruling 2004-86, which lets you exchange real property for an interest in a DST without recognizing gain under Section 1031, provided the other 1031 requirements are met. That treatment comes with a set of strict requirements, also known as the Seven Deadly Sins, and one of them matters most to you: Once the offering closes, the sponsor generally cannot raise new money or restructure the financing. If the property runs into trouble, the trust’s hands are largely tied.Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.That puts enormous weight on one thing: Who the sponsor is. A DST is only as sound as the company managing it and the building underneath it. Distributions are not guaranteed. Real estate values can fall. Some sponsors have run into serious trouble, and their investors had little recourse. Anyone who tells you a DST is safe is selling, not advising. The right question is not whether DSTs are safe. It is whether this specific property, run by this specific sponsor, at this specific price, is worth your money.So, is a DST right for you?Go back to John, the man with the strip center. He was done being a landlord, he was accredited, his proceeds were large enough to spread across three properties, he had plenty of liquidity elsewhere and he wanted what was left to pass cleanly to his daughter. Five for five. For him, the decision to invest in a DST was close to perfect, and that is exactly what we did.If you answered those five questions the way he did, a DST may be one of the best decisions you make in retirement. If you stumbled on even one of them, that is not a reason to give up. It is a reason to slow down and look harder, because the wrong DST is far more expensive than no DST at all. The vehicle rarely fails those investors. The question they skipped does.Related ContentWhat Is Capital Gains Tax Deferral?Don’t Defer Retirement if You’re a Landlord, Defer Taxes InsteadDST Inventory Just Hit a Record $3.9 Billion: What 1031 Exchange Investors Should Do NextWhy Your Next 1031 Exchange Decision Might Not Be About Taxes (It Could Be About Life)A 1031 Exchange May Look Great for You on Paper, But It’s Not Just About TaxesThis article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. 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Is a Delaware Statutory Trust Right for You? 5 Questions to Ask Before You Invest
