Chapter 11
DST Misconceptions
Common Misconceptions about Delaware Statutory Trusts.
Delaware Statutory Trusts (DSTs) are sometimes misunderstood by investors considering them as a 1031 replacement option. These misconceptions can lead to unrealistic expectations or poor decision-making. Below are some of the most common misunderstandings.
Misconception 1: DSTs are risk-free or low-risk
While DSTs reduce management responsibilities, they do not eliminate investment risk. Investors are still exposed to real estate market risk, tenant risk, interest rate risk, sponsor risk, and illiquidity. Cash flow and return of capital are not guaranteed.
Misconception 2: DSTs provide the same control as direct ownership
Many investors assume they will retain some influence over the property. In reality, once capital is invested in a DST, the investor has no control over management decisions, leasing, financing, or the timing of a sale.
Misconception 3: DSTs are always more tax efficient than direct ownership
While some DSTs can offer strong depreciation benefits (especially moderately leveraged ones), the overall tax outcome depends on the specific offering, leverage level, and the investor’s personal tax situation. DSTs are not automatically more tax-efficient.
Misconception 4: DSTs are liquid investments
DSTs are generally illiquid. There is no secondary market for most DST interests, and investors should plan on holding their investment until the sponsor sells the underlying property — which can take many years.
Misconception 5: All DSTs are essentially the same
DST offerings vary significantly in asset quality, sponsor experience, leverage levels, fees, and risk profiles. Two DSTs in the same asset class can produce very different outcomes depending on the sponsor and specific property.
Misconception 6: DSTs are only for retirees
While DSTs are popular with investors seeking to reduce management burden in retirement, they can also be appropriate for younger investors who want diversification, institutional-quality assets, or relief from active management while still deferring taxes.
Misconception 7: DSTs eliminate the need for due diligence
Because the investor gives up control, thorough due diligence on both the sponsor and the specific offering becomes even more important — not less.
Understanding these realities helps investors approach DSTs with appropriate expectations and make better-informed decisions.
If you would like a clear and honest discussion about whether DSTs are a good fit for your situation, schedule a consultation or a brief call today by calling (949) 722-1031.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
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