WASHINGTON, 2025-06-18 15:36:00
Beyond DSTs: Navigating Real Estate Investment Options
High-net-worth investors are rethinking traditional real estate investment strategies, seeking more versatility and tax efficiency.
- DSTs are not always the best fit, especially for those with over $3 million in appreciated real estate.
- Option options include direct syndications, 721 UPREIT structures, and TICs.
- Liquidity planning is crucial to address the illiquidity of DSTs.
In a shifting economic and tax climate, real estate investors are increasingly exploring alternatives to Delaware Statutory Trusts (DSTs).Scott Smith, Principal of Lamplighter Capital Advisors LLC, is seeing a trend among high-net-worth individuals seeking more complete strategies. Investors are now leveraging tools beyond DSTs for tax-advantaged real estate investments.
“While DSTs offer convenience and 1031 compatibility, they’re not always the best fit, especially for investors with approximately $3 million or more in appreciated real estate,” Smith said.
Smith emphasizes that a holistic approach, considering financial goals, estate plans, and income needs, is crucial. dsts are just one piece of the puzzle. Other avenues include direct syndications, 721 UPREIT structures, Tenancy-in-Common (TIC) arrangements, and Qualified Possibility Funds (QOFs).
A 1031 exchange allows you to defer capital gains taxes when selling an investment property and reinvesting the proceeds into a similar property. DSTs are frequently enough used in 1031 exchanges, but explore all your options to find the best fit for your financial situation.
What are the liquidity challenges associated with DSTs, and how can investors address them?
DSTs present liquidity challenges. Typically, these investments have a five-to-ten-year hold period with no built-in secondary market. This can be a constraint for investors needing flexibility.Smith recommends starting liquidity planning early, ideally when a client is under contract to sell their down-leg of the transaction.Strategies include access to income-producing direct investments or partially deferring taxes through structured 1031 exchanges, possibly combining DSTs with other vehicles. The aim is to help clients avoid rigidity and make informed decisions.
Don’t wait until you need the money to think about liquidity. Discuss potential exit strategies and alternative investment options with your advisor well in advance.
Direct passive real estate syndications are gaining traction, as are 721 UPREIT structures that convert real estate into REIT shares, offering both deferral and long-term estate planning benefits. Custom TICs and structured co-investments are also being revisited by high-net-worth investors. The focus, Smith says, should be on expanding the solution set rather than simply replacing DSTs.
Direct syndications offer more control over asset selection, leverage, and exit timing. This can lead to higher returns but introduces more operational complexity. DSTs, however, offer simplicity and standardized 1031 compliance. Smith models both syndications and dsts to help clients make informed decisions based on their risk tolerance and goals.
Syndications offer more control but require more active management.DSTs are passive investments with less control but greater simplicity.
TICs are still viable, but less frequently used. TICs may be a better fit in specific scenarios, such as custom 1031 solutions involving family members or high-value exchanges. They are best suited for all-cash exchanges with later refinance opportunities. Smith helps clients evaluate when a TIC arrangement makes strategic sense, working with their legal and tax advisors to structure it properly.
The economic and legislative outlook, including sunsetting provisions of the Tax Cuts and Jobs Act, is creating pressure and opportunities for real estate investors. Many are rebalancing by blending DSTs with direct syndications, exploring cash-based oil and gas investments, and using structures like UPREITs. Smith helps clients model various approaches to ensure they choose strategies that align with their current and future needs.
DSTs are well-suited for those who wont to defer all capital gains taxes through a 1031 exchange. QOFs, conversely, allow investors to defer capital gains from most asset sales and perhaps eliminate tax on new gains after a 10-year hold. QOFs can offer more geographic and asset-class diversification. For investors with gains from a business sale or stock portfolio, QOFs can be a compelling alternative.
Qualified Opportunity Funds (QOFs) offer unique tax benefits for investors with capital gains from various sources, not just real estate.consider QOFs for broader diversification and potential long-term tax advantages.
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Exploring Alternative Real Estate Investment Options: A Deeper Dive
As we’ve established, the landscape of real estate investment is evolving. Beyond DSTs,investors are actively seeking strategies that align better with their individual financial circumstances and risk tolerances. This exploration demands a comprehensive understanding of diverse investment vehicles, their respective advantages, and the potential challenges they present. Let’s delve deeper into some of these alternative real estate investment options.
One of the most accessible alternative investment types is Real Estate Investment Trusts (REITs) [[1]]. REITs pool capital from numerous investors to own and operate income-producing real estate. This often includes properties like office buildings, apartments, hotels, or shopping centers.Investing in REITs allows individuals to gain exposure to real estate without directly purchasing, managing, or financing a property.
Direct syndications offer another avenue for real estate investment. In a direct syndication, a sponsor identifies a specific property or advancement project and raises capital from investors. Investors than become limited partners in the entity that owns the property. Syndications typically involve more hands-on involvement from the investor, giving them a greater degree of control, but also demand more due diligence.
721 UPREIT structures, which convert real estate into REIT shares, are gaining popularity, notably when combined with long-term estate planning. This approach allows investors to defer capital gains taxes while potentially providing significant estate planning benefits. The structure involves transferring property to an operating partnership in exchange for units, which can then be exchanged for shares of the parent REIT.
Tenancy-in-Common (TIC) arrangements, although less commonly used, still offer niche opportunities. TICs allow multiple investors to own undivided interests in a single property. These arrangements are well-suited for 1031 exchanges and are particularly effective for investors seeking custom solutions, such as those involving family members or high-value exchanges.
Qualified Opportunity Funds (QOFs), as mentioned previously, provide another attractive option. qofs allow investors to defer capital gains from various sources by investing in designated Opportunity zones. This gives investors a significant tax advantage, especially for those with significant capital gains from business sales or stock portfolios. These funds can also offer increased diversification across geographic locations
