A Delaware Statutory Trust, or DST, is a legal entity formed under Delaware law. Its purpose is to allow several investors to each own a fractional share of larger-scale institutional property.
That share can serve as replacement property in a 1031 exchange. So instead of buying a whole building, you can exchange into part of a larger one.
To qualify, the DST must follow IRS Revenue Ruling 2004-86. Under that ruling, your beneficial interest in a properly structured DST is treated as a direct interest in the underlying real estate for federal income tax purposes.
How the structure works
The trust owns 100% of the real estate. You own a beneficial interest in the trust. That produces several practical effects.
Lower investment amounts than buying outright
The process can be simpler than a direct purchase
Any loan is made to the trust, not to each investor
You are not underwritten individually
Loan carve-outs generally apply to the sponsor, not to you
No single investor can trigger a default on the whole loan
You do not need a separate entity to hold your interest
The sponsor makes decisions on behalf of investors, keeping the DST passive while limiting 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
Passive ownership, with no management responsibilities
The ability to build a diversified real estate portfolio
Depreciation that may help offset taxable income
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 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
