What is a Delaware Statutory Trust (DST)?

A DST in a 1031 exchange

A Delaware Statutory Trust, or DST, is a legal entity formed under Delaware law that holds title to investment real estate, often larger, institutional-quality properties. Multiple investors can each own a fractional beneficial interest in the trust.

When the DST is properly structured under IRS Revenue Ruling 2004-86, that beneficial interest is treated as direct ownership of the underlying real estate for federal income tax purposes. This allows it to serve as replacement property in a 1031 exchange, as long as the exchange meets all other requirements.

How the structure works

The trust owns 100% of the real estate, and you own a beneficial interest in the trust. That has several practical effects. Investment amounts are lower than buying a property outright, and the process can be simpler than a direct purchase. Any loan is made to the trust, not to each investor, so you are not underwritten individually, loan carve-outs generally apply to the sponsor rather than to you, and no single investor can trigger a default on the whole loan. You also do not need a separate entity to hold your interest. The sponsor makes decisions on behalf of investors, which keeps the DST passive but limits investor control over the asset.

Why consider a DST?

• Access to institutional quality real estate
• Diversification by property type and location
• A turnkey structure — the sponsor handles sourcing, due diligence, financing and management
• Greater certainty of closing on your replacement property
• No day-to-day property management
• Potential for monthly income
• Long-term, non-recourse financing usually in place

These are potential benefits, not assurances.
See our risk disclosures.

Limitations on a DST

A DST is tightly restricted by IRS Revenue Ruling 2004-86. Often called the Seven Deadly Sins, these limitations help preserve its passive structure for 1031 purposes.

A DST generally cannot:

• Accept additional capital after the offering closes
• Renegotiate or add debt, except in limited circumstances
• Reinvest proceeds from a property sale
• Make more than minor, non-structural improvements
• Invest cash beyond short-term debt obligations
• Retain cash beyond necessary reserves
• Renegotiate leases or enter new ones, except in limited circumstances

Investing cash rather than exchange funds

You do not need 1031 exchange proceeds to invest in a DST. Cash investors may also invest in a DST, subject to the terms and requirements of the particular offering. A cash investor may look to a DST for potential monthly income, ownership in institutional-quality real estate, passive ownership with no management responsibilities, the ability to build a diversified real estate portfolio, and depreciation that may help offset passive income, subject to the passive activity rules.

Is a DST a fit for you?

A DST gives accredited investors a way to complete a 1031 exchange or invest cash in professionally managed real estate without day-to-day property management. Talk with your tax advisor about whether a DST could benefit you. We’re happy to discuss how it may fit your situation and help you plan around your exchange deadlines.