How much of my exchange or net worth should go into DSTs?

The exchange equation fixes the dollars; only the shape of the replacement is yours to choose

Start from the requirement, not the allocation. Full deferral needs replacement property worth at least your net sale price, with the debt you paid off either replaced by new debt or covered by your own cash (do I reinvest the whole sale price, do I have to replace my mortgage).

Hypothetical, round numbers. You sell for $1,200,000 net, pay off a $400,000 loan and send $800,000 to the qualified intermediary. Buying a $600,000 building with a $200,000 mortgage uses $400,000 of that equity and produces $600,000 of replacement value.

The remaining $400,000 of equity has to buy $600,000 of value. A trust at roughly 33% leverage does it: $400,000 of equity carrying $200,000 of the trust's share of debt. Total replacement value is $1,200,000 and the debt is replaced, so the split is not a preference — it is the only arrangement that closes the equation (splitting an exchange between a DST and a direct purchase, does a DST loan count as replacement debt).

Why an adviser balks at a third, and what to ask him for instead of a number

Reg BI does not contain a percentage. It requires a reasonable basis to believe the recommendation is in your best interest "based on that retail customer's investment profile", and the rule defines that profile to include "age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance".

A second limb covers the whole programme rather than one trust: the firm must also believe "a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive" for you. FINRA Rule 2111 frames the same idea as reasonable-basis, customer-specific and quantitative suitability.

So when a planner says a third is too much, he is applying those tests, not citing a rule. The useful reply is to ask three things: the firm's written concentration guideline for illiquid alternatives, what it counts as liquid net worth, and which reasonably available alternatives it compared before recommending or objecting. Confirm the tax side separately with your CPA or attorney, since none of this is advice for your situation.

How many trusts: minimums divide the money, the identification rules cap the list

Two hard constraints do most of the work. Minimums for 1031 investors are commonly $100,000 per trust, so a $500,000 exchange supports at most five positions and realistically three or four once each one is sized to matter.

The identification rules cap the other end. Three names is unlimited by value under the three-property rule, and going beyond three means keeping the combined value of everything you list within 200% of what you sold (how many properties can I identify).

Those names compete. If you are also identifying a building you intend to buy, and a backup in case it falls through, the DST names are fighting for the same three slots (using DSTs as backup properties, DST minimums and splitting an exchange).

Diversify along five axes, not five names

Five interests from one sponsor, in one sector, at one leverage level, maturing in the same year is one position wearing five subscription agreements. The axes that actually separate outcomes are these.

• Sponsor, because sponsor-level failure hits every trust it manages (how to evaluate DST sponsors).
• Sector, because industrial, medical office and multifamily do not move together.
• Geography, and with it state tax exposure and climate and insurance risk.
• Leverage, since an unlevered trust and a 60% loan-to-value trust respond to a rate shock very differently (DST leverage and interest-rate risk).
• Expected sale window, so your capital does not all come back in one year and land you in several 45-day clocks at once.
• Tenant count is a sixth worth checking: one trust with a single tenant behaves nothing like a portfolio trust (single-tenant versus portfolio DSTs).

What too many actually costs: a grantor letter per trust and a return per state

Each trust reports separately to you, so six trusts means six sets of figures to hand your preparer each spring, arriving at their own pace. That alone delays returns more often than investors expect (how DST income is taxed and reported).

Properties in states with income tax can create nonresident filing obligations, and a six-trust, twelve-state portfolio can mean a stack of state returns for diversification you already had at four sponsors (state tax and multi-state filing issues).

There is also a subscription burden: separate accreditation, separate documents, separate wires, all inside the 180 days. Past four or five positions the marginal diversification is small and the marginal paperwork is not.

How the arithmetic falls out at three exchange sizes

These are the mechanical consequences of the minimums and the identification limits, not recommendations. Hypothetical, round numbers throughout.

• $500,000 of equity at $100,000 minimums: five positions is the ceiling, and three sponsors is usually where the sizes still matter individually.
• $1,000,000: three to five trusts across two or three sectors, comfortably clear of minimums, with the identification list as the real constraint.
• $2,000,000 and up: minimums stop binding entirely, and the limits become your identification list, the number of tax returns you are willing to file, and how much of the total you want illiquid.
• In every case the part of your wealth outside the exchange is what answers the concentration question, because the rental you are selling was already the concentrated position (DST versus direct ownership).

The ceiling question nobody asks first: what do you need back, and when

Illiquidity is the constraint that bites, not the percentage. A DST interest has no secondary market, distributions can be reduced, and the trust sells on the sponsor's timetable rather than yours (how hard it is to exit early).

So work backwards from cash needs rather than forwards from a ratio: a known tuition bill, a roof on your own house, a spouse's care costs. Money needed inside the projected hold period should not be in the exchange at all, even if that means paying tax on part of the sale (leftover cash after a 1031, taking some cash out deliberately).