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. That ruling lets the IRS treat your stake in the trust as direct ownership of real estate rather than as a security. That treatment is what makes the exchange work.
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
Fast closing, which matters against a 45-day deadline
Greater certainty of closing on your replacement property
No day-to-day property management
Potential for monthly income
Long-term, non-recourse financing already in place
These are potential benefits, not assurances. See the disclosures below.
Investing cash rather than exchange funds
A tax-deferral strategy
Rental income paid monthly
Ownership in institutional-quality real estate
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 hold the same class of interest and receive the same distributions.
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.
A DST can accept up to 1,999 investors
The minimum investment is lower than buying outright
The process is simpler and quicker than a direct purchase
The lender makes one loan to the trust rather than lending to each investor
You are not underwritten individually
Loan carve-outs 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
That last point cuts both ways. Sponsor control is what makes a DST passive. It also means you do not control the asset.
Limitations on a DST
A DST is tightly restricted in what it can do. These rules come from IRS Revenue Ruling 2004-86 and are often called the Seven Deadly Sins. They exist to keep the trust passive enough to qualify for 1031 treatment.
Once the offering closes, no further capital can be contributed by new or existing investors
The trust cannot renegotiate its loans or borrow more, except if a tenant goes bankrupt or insolvent
The trust cannot reinvest proceeds from selling its real estate
Capital improvements are limited to minor, non-structural work, plus anything the law requires
Cash held between distributions can only go into short-term debt obligations
All cash beyond necessary reserves must be paid out to investors
The trust cannot renegotiate leases or sign new ones, except if a tenant goes bankrupt or insolvent
Give us a call and lets discuss your 1031 exchange
972-661-1283 ext: 3
