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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A Delaware statutory trust is an illiquid investment: you should not expect to sell your interest whenever you need cash. A private resale may be possible, but it requires a permitted transfer, a willing buyer, an agreed price, and a completed closing. This guide explains how to assess those limits before investing and what to review if you later need an early exit.
Liquidity means being able to turn an asset into spendable cash within the time you need, at a price you can accept. A property may have value without giving you that access. The same is true of a fractional interest in a trust that owns property.
The SEC warns that private placements can be highly illiquid. Even when a resale is legally possible, finding a buyer may be difficult. An investor may need to hold the investment for an indefinite period. Those warnings deserve weight when the money is intended to help fund retirement, care costs, or other time-sensitive needs. [1]
A DST can send regular cash payments while the principal remains hard to access. The payments and the ability to sell are separate issues. If you receive $500 a month, that does not mean you can request $50,000 of principal next week.
I would start with the assumption that an early sale will not be available when you need it. That is a planning choice, not a claim that no DST interest has ever been resold. A possible buyer is helpful only when the terms work and the sale actually closes.
Revenue Ruling 2004-86 describes a DST whose interests are transferable but not traded on an established securities market. That distinction matters. Legal ability to transfer an interest does not create a ready market or a right to demand cash from the trust. [2]
The ruling also places limits on the trust’s ability to accept new capital, change its debt, and vary the investment. You should not assume the trustee can refinance the property and cash you out merely because your needs have changed. The actual documents and tax structure must support any proposed action. [2]
Think of an early exit as four separate questions:
A favorable answer to one does not answer the others. A permitted transfer can still lack a buyer. An interested buyer can still fail the approval process. A closing can still leave you with less cash than you expected.
Interests acquired through private offerings are often restricted securities. A resale must be registered or fit an available exemption. The SEC describes several possible paths for private secondary transactions, each with its own conditions. State securities requirements may also need review. [3]
Rule 144 is one possible federal safe harbor. Its conditions depend on facts such as whether the issuer files public reports and whether the seller is an affiliate. An affiliate is someone who controls the issuer, is controlled by it, or is under common control with it. Do not decide that status solely from the size of your investment. [4]
Under Rule 144, restricted securities of a nonreporting issuer generally have a one-year holding-period requirement. Reporting-issuer rules can differ. Other conditions and exceptions need review, including how and when the holding period starts. The rule is not the only possible resale path. [4]
That one-year rule is not a promise of liquidity on the first anniversary. It does not require the sponsor to repurchase your interest, remove contract restrictions, or produce a buyer. Nor does it mean every transfer before a year is impossible under every other exemption.
Have securities counsel and the firms involved identify the path for the actual transaction. Posting an offer online or finding an accredited friend does not, by itself, establish that the sale complies with the law. Obtain that answer before marketing the interest or signing a binding agreement.
Start with the private placement memorandum, trust agreement, subscription documents, and later amendments. Look for the sections on transfers, sale restrictions, investor approval, and withdrawal rights. Ask for the current transfer procedure in writing.
Specific questions help:
These are questions to resolve, not claims that every offering has each restriction. A friendly phone call with the sponsor should lead back to the controlling documents. If a summary conflicts with the agreement, have counsel resolve the conflict.
Also distinguish a withdrawal, a redemption, and a resale. Withdrawal suggests leaving the arrangement. Redemption means an issuer or another designated party buys the interest under an applicable program or agreement. A resale means a buyer replaces you. Permission for one does not establish a right to the others.
A secondary transaction is a sale by an existing investor to another investor. It is different from the sponsor selling the underlying building. The SEC’s private-secondary-market guidance makes clear that these transactions have their own legal requirements. [3]
The process may begin with a request to the sponsor or the firm that sold the investment. Ask whether it offers resale assistance and what that assistance includes. There is a difference between providing transfer forms and actively seeking a buyer.
If a third party proposes to help, verify its identity and role before sharing sensitive information. Ask who it represents, how it is paid, whether it is buying for its own account, and whether its price is firm. A stated interest in your holding is not the same as a funded purchase agreement.
Build a document packet with the latest financial reports, payment history, ownership records, loan information, and material notices. Use approved secure channels. A buyer needs to assess current facts, not just the brochure that existed when you bought.
The remaining steps can include buyer review, pricing, required consents, tax and legal review, signed documents, funding, and updating the ownership record. Ask who is responsible for each step. Avoid planning to spend proceeds before the funds have cleared and the closing is final.
Before comparing an offer with a statement value, ask how that value was set. It might reflect original cost, an estimate, or a valuation from a particular date. Those measures answer different questions. None is automatically a bid that a buyer must honor.
A buyer may examine current rent, tenant strength, debt, upcoming repairs, fees, and the likely exit. The buyer also takes on the remaining limits on control and resale. Information gaps can affect what that buyer is willing to pay.
Separate these numbers in your notes: the original amount invested, the latest stated value, the buyer’s gross offer, and the cash you would keep after costs. Do not call their difference a standard “secondary-market discount.” Without reliable transaction data for comparable interests, a universal discount rate would be guesswork.
Some prices may be below an investor’s reference value. Others may differ for reasons that have little to do with distress. The reference itself may be stale or may use different assumptions. A low offer does not prove the correct value, and a high statement value does not prove the offer is unfair.
If the amount is material, consider independent valuation advice. Be clear about the question: valuing a fractional interest for a potential transfer can differ from valuing the entire building.
Here is an illustration, not a market quote. Assume your reference value is $100,000. One buyer offers $85,000, and you expect $3,000 of transaction costs. Your cash before tax would be $82,000. That is 18% below the reference value, even though the gross offer is only 15% below it.
A second buyer offers $88,000 but the expected costs are $6,500. That leaves $81,500 before tax. The higher offer produces $500 less cash under those assumptions.
| Illustrative comparison | Offer A | Offer B |
|---|---|---|
| Gross cash offer | $85,000 | $88,000 |
| Expected transaction costs | $3,000 | $6,500 |
| Cash before tax | $82,000 | $81,500 |
Costs are only one difference. Compare deposits, financing conditions, approval deadlines, the date of payment, and who receives distributions during the closing period. Ask which costs you owe even if the transaction fails.
A lower but firm, fundable offer may be more useful than a higher indication that can be withdrawn. That does not make it the right choice in every case. The decision should reflect your deadline, the risks of waiting, and the terms you are actually agreeing to.
Your current tax basis may be much lower than the amount of equity you originally invested. A prior 1031 exchange can carry deferred gain into the replacement property. Depreciation and other adjustments can change basis again during ownership. IRS Publication 544 explains how amount realized and adjusted basis determine gain or loss. [5]
The cash check is not always the entire amount realized. Debt relief can also enter the calculation. Ask your CPA to model the proposed sale using the current basis schedule, allocated debt, selling expenses, and the actual terms. [5]
Consider a simplified example involving an interest treated as ownership of the underlying real estate. The investor receives $85,000, incurs $5,000 of selling expenses, and is relieved of $60,000 of allocated debt. Amount realized is $140,000: $85,000 minus $5,000 plus $60,000. If the adjusted basis is $70,000, the realized gain is $70,000. Cash before tax is only $80,000.
Even if the investor originally contributed $100,000 of equity, those facts do not produce a $20,000 tax loss. This example leaves out other adjustments, prior cash payments, and the tax rate calculation. It shows why cash results and taxable gain need separate columns.
Have the CPA also address the character of gain, depreciation-related rules, state taxes, and any applicable losses. An estimated tax bill belongs in the sale decision before you accept an offer.
Possibly, if the interest and transaction qualify. Revenue Ruling 2004-86 supports real-estate treatment for the arrangement described in it; it does not provide a blanket tax answer for every DST or later transfer. [2]
Speak with your tax advisers and a qualified intermediary before closing. A planned exchange needs the right agreements and handling of proceeds. Taking the money into your own account and then trying to exchange can defeat the required structure. Identification and closing deadlines also apply. [6]
There is a practical conflict to address. If you are selling because you need spendable cash, exchanging the proceeds into another illiquid investment may not solve the problem. A partial exchange may involve recognized gain and requires its own calculation.
Do not let the desire to avoid a current tax bill hide the reason you are selling. Compare the after-tax cash option with the exchange option against your actual needs. They may serve different purposes.
Review the stated business plan for the specific trust. Do not replace it with a generic claim that all DSTs last five, seven, or ten years. An expected sale window, a loan maturity date, and a trust termination provision can be different dates with different consequences.
A sale can take longer than planned. An earlier sale can also create an unwanted reinvestment decision. Neither result means the original forecast was a binding promise.
Ask who chooses the sale date and whether investors have any relevant vote. Find out how the manager communicates changes. If there are rights that could move investors into another form of ownership, review those terms too. A change to units or shares does not necessarily provide immediate cash.
Holding until the property sells is also not a guarantee of recovering your original investment. The sale must cover debt, expenses, and any other claims before the remainder reaches investors. Liquidity planning needs to account for both timing and the amount that might be returned.
List known spending needs before choosing an allocation. Include ordinary living expenses, taxes, planned gifts, major purchases, and the cost of caring for family members. Then add a way to handle expenses that are not yet known. The right amount depends on your situation; a single percentage cannot answer it for everyone.
For example, suppose a household expects to need $90,000 next year beyond reliable income and has $110,000 in readily available cash. Investing another $80,000 of that cash in an illiquid asset would leave $30,000 against the $90,000 need. Expected DST payments or an unconfirmed resale should not be used to pretend the $60,000 gap is already covered.
If exchange proceeds are involved, retaining cash may have tax consequences. That still does not make an unsuitable illiquid investment the better choice. Model the tradeoff rather than assuming full tax deferral is the only goal.
Also stress-test a reduction in distributions. Can the rest of the household finances cover the shortfall without forcing another sale? An investment that appears affordable only if every payment arrives on schedule deserves a closer look.
Spreading money across investments with different expected sale dates can reduce reliance on a single forecast. But the dates remain forecasts. Several properties can face the same weak lending or sale market at the same time.
Imagine three DSTs expected to sell in years four, six, and eight. If all three need favorable financing conditions for their buyers, the apparent spacing does not guarantee three separate cash events. One might sell early, another late, and one for less than expected.
Use staggered exits as one possible planning feature, not as a substitute for accessible reserves. Diversification can change your mix of risks without turning private interests into cash on demand.
A publicly traded REIT has shares listed on a stock exchange, where investors can generally seek to sell at the market price. That offers a different route to liquidity, but the share price can fall and trading conditions can change. Being easy to sell does not mean being safe from loss. [7]
A non-traded REIT is different. It does not have that stock-exchange route, and any repurchase program has its own terms. Do not use “REIT” as shorthand for immediate access to cash. [7]
The tax comparison also differs. Ordinary REIT shares are not direct 1031 replacement real estate. Choosing accessible investments with taxable proceeds can be a valid planning discussion, but it is not the same transaction as acquiring a qualifying DST interest in an exchange. [8]
First, define the problem in dollars and dates. Do you need all of the principal, or a smaller amount? Is the need permanent, or tied to a bill due next month? That information helps your advisers compare realistic options without assuming a sale will happen.
Request the current transfer rules and updated investment information. Obtain a tax estimate and a written list of potential costs. If someone offers to buy, review the buyer’s conditions and funding before treating the offer as a solution.
A family transfer, estate transfer, or pledge may also require consent and legal review. Changing the owner does not itself generate cash. Borrowing elsewhere adds debt, interest, and repayment risk; it should not be described as free liquidity from the DST.
Keep records of communications and avoid pressure to sign before you understand the terms. A genuine need for cash can make a quick offer feel more certain than it is. I would rather identify the limits clearly than promise an exit the documents and market cannot deliver.
You should not plan on it. Securities rules, offering terms, buyer demand, approvals, and price can all affect a resale. A permitted sale still needs a buyer and a closing. Private placements may need to be held indefinitely if an exit is not available. [1]
No. Rule 144 is a securities-law safe harbor with conditions that depend on the facts. Meeting an applicable holding period does not create a buyer, a redemption right, or an exemption from contractual transfer limits. Have counsel assess the transaction itself. [4]
There is no universal discount that this guide can support. Compare current bids, the basis for any stated value, transaction costs, and taxes. Property results, remaining risks, information quality, and the buyer’s terms can affect price. A reference value is not a guaranteed sale price.
Check the specific documents. Partial transfers may face minimum-size rules, consents, and buyer requirements. A willing buyer does not remove those conditions. Ask how ownership records, future distributions, debt allocations, and tax reporting would be divided before agreeing to a partial sale.
No. Cash payments during ownership are separate from a right to recover principal. Payments can also change or stop. Keep spending needs and emergency resources outside an assumption that the trust will either pay a fixed amount or repurchase your interest. [1]
Yes. Adjusted tax basis, prior deferral, depreciation, and debt relief can produce a gain even when cash received is below the original equity contribution. Ask your CPA to calculate the actual sale rather than treating the difference in cash as the tax result. [5]
No. The sale price, debt, costs, and other claims determine what remains for investors. A long holding period does not protect principal. Assess whether you can accept both uncertain timing and a possible loss, alongside the specific property and offering risks. [1]
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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