7/31/2023 0 Comments Passive income md![]() ![]() If you prefer active management and real estate that can potentially be liquidated quickly, direct ownership may be the best fit for you. The difference between active and passive investing is significant, and it's important for investors to understand which approach aligns with their goals. ![]() DSTs are also professionally managed on behalf of investors, meaning that investors have no control on how these assets are managed. There is also no secondary market for DSTs, meaning you cannot sell your interests as easily as you could with a direct ownership property. While both DSTs and direct ownership are considered illiquid, one noticeable difference between DSTs is that they typically have a hold period of five to seven years. As with all real estate investments, DSTs may also lose value, and their income stream can be impacted by tenant losses, which means it is not guaranteed. The potential disadvantages of DSTs are similar to those of direct ownership. Potential Disadvantages Of Investing In A DST Compared To Direct Ownership When an investor uses the proceeds from a 1031 exchange to reinvest in real estate directly, they become an active investor.įor those seeking a truly passive investment, a DST may be a better option as it allows for passive ownership with the tax benefits of real estate investment, as well as the ability to better diversify one's real estate holdings. Despite the potential for passive income, direct ownership often requires active management, including due diligence, hiring professionals, securing financing and managing property. While many investors choose real estate to diversify their portfolios and attempt to earn passive income, direct ownership can be misleading. Potential Advantages Of Investing In A DST Compared To Direct Ownership The key difference is using a 1031 exchange for a DST investment allows the investor to transition from an active to a passive role, diversify their real estate holdings and retain possible tax benefits of direct real estate ownership. Someone selling a property can roll the sale proceeds into the DST in the same way as a 1031 exchange for direct property purchase. There are two main ways to invest in a DST: direct cash investment or a 1031 exchange. The sponsor receives a fee for structuring and overseeing the investment on behalf of the investors. ![]() Unlike limited partnerships or LLCs, the DST sponsor acquires the properties to be offered within the trust using their own capital, conducting due diligence, sometimes securing long-term debt and making the offering available to investors. DSTs are a legally recognized way for investors to complete a 1031 exchange. A DST is a legal entity providing limited liability and potential pass-through income to investors, such as cash distributions to the owners. It operates similarly to a limited partnership, where multiple investors pool their capital to invest alongside a sponsor who manages the investment. What Is A DST?Ī DST is a popular investment vehicle for fractional real estate ownership, offering passive ownership for investors. Once the new like-kind asset is acquired, the investor typically becomes actively involved in property management and operations. To qualify for tax-saving benefits, the investor must close on the replacement property within 180 days from the date of closing on the relinquished property. ![]() Upon receiving the proceeds from the sale, the investor has 45 days to identify a replacement property to buy. The most common type of 1031 exchange is a "delayed exchange," where a third-party "qualified intermediary" facilitates the sale of the property and ensures the proceeds are used to purchase another like-kind property. 1031 exchanges seem straightforward, but are complicated in practice. ![]()
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