What is a Delaware Statutory Trust?

A Delaware Statutory Trust, or DST, is a legal entity that holds title to institutional-grade real estate and sells fractional beneficial interests in that property to investors. The IRS ruled in Revenue Ruling 2004-86 that a properly structured DST interest is treated as direct ownership of real property, which means it qualifies as replacement property in a 1031 exchange. Investors receive monthly or quarterly distributions and a share of the eventual sale proceeds, and have no management responsibility.

Does a DST qualify for a 1031 exchange?

Yes. Revenue Ruling 2004-86 confirmed that a beneficial interest in a properly structured DST is treated as an undivided interest in real property for purposes of Section 1031. This is why DSTs are the standard solution for owners who want to defer tax but do not want to manage another building. The trust must follow strict operating restrictions to keep that treatment.

What is the minimum investment in a DST?

Most DST sponsors set a minimum of $100,000 for 1031 exchange investors, though some accept $25,000 to $50,000 for cash investors. Because minimums are relatively low compared to buying a building, an exchanger can spread proceeds across several DSTs in different property types and different parts of the country.

Do I have to be an accredited investor to buy a DST?

Yes. DST interests are securities sold through private placements under Regulation D, so they are limited to accredited investors. In general that means an individual with more than $1 million in net worth excluding a primary residence, or income above $200,000 individually or $300,000 jointly for the past two years. Most owners selling a long-held property meet the net worth test from the sale itself.

Sponsors typically project first-year cash distributions in the range of roughly 4 to 6 percent of the amount invested, paid monthly or quarterly. These are projections, not guarantees, and they can be reduced or suspended. A meaningful portion of the distribution is often sheltered from current tax by depreciation on the new property, which raises the after-tax yield relative to the headline number.

What are the risks of a DST?

The main risks are illiquidity, since there is no public market and you should expect to hold for five to ten years; loss of control, because you cannot vote on operating decisions or force a sale; sponsor risk, since you are relying entirely on that firm's competence and integrity; leverage risk, because most DSTs carry mortgage debt; market risk in the property's sector and location; and fee drag, since upfront costs reduce the capital actually working for you. Principal loss is possible.

What are the seven deadly sins of a DST?

To preserve its tax treatment, a DST trustee cannot accept new capital after the offering closes, renegotiate the existing mortgage or borrow new money, reinvest sale proceeds, make more than minor capital improvements, reinvest cash between distributions in anything other than short-term government obligations, retain cash beyond a reserve, or renegotiate leases or enter new ones except in a tenant bankruptcy or default. These restrictions make a DST passive by design and limit how the sponsor can respond to trouble.

What is a 721 UPREIT exchange and how does it relate to a DST?

A 721 exchange, sometimes called an UPREIT, lets you contribute property or a DST interest to the operating partnership of a real estate investment trust in return for partnership units, without triggering tax. Some DSTs are structured to be acquired by an affiliated REIT after a holding period, converting your interest into REIT units. This can improve liquidity and diversification, but it ends your ability to do future 1031 exchanges, because partnership units are not like-kind real property.

The other half of the strategy

What is a DST?

How a Delaware Statutory Trust lets you complete a 1031 exchange without ever owning another building, and the honest case for why you might not want one.

The short answer

A Delaware Statutory Trust, or DST, is a legal entity that owns large institutional real estate and sells fractional shares of that ownership to individual investors. The IRS confirmed in Revenue Ruling 2004-86 that a properly structured DST interest counts as direct real property ownership, so it works as replacement property in a 1031 exchange.

You put your exchange proceeds into one or more DSTs. A professional sponsor runs the property. You receive monthly or quarterly income and a share of the eventual sale. You do no management work of any kind. In return you give up control and liquidity for five to ten years.

Key facts at a glance

Legal basis: IRS Revenue Ruling 2004-86
1031 eligible: Yes, treated as an undivided interest in real property
Typical minimum: $100,000 for exchange investors
Who can invest: Accredited investors only, sold by private placement
Typical projected income: Roughly 4 to 6 percent per year, paid monthly or quarterly, not guaranteed
Typical hold period: Five to ten years, at the sponsor's discretion
Liquidity: Very limited. There is no public market for DST interests
Closing speed: Two to five business days, which makes DSTs useful as backup identifications

The simplest way to picture it

Imagine a 320-unit apartment community in Charlotte, North Carolina, worth $90 million. One person cannot buy it. But if the building is placed in a trust and the trust sells beneficial interests, a hundred different investors can each own a slice.

You might put in $475,000 and own a little over half of one percent of that community. A professional management company handles leasing, maintenance, insurance, taxes, and everything else. Each month your share of the net rent is deposited into your account. When the sponsor eventually sells the property, you receive your share of the proceeds.

What makes this different from buying shares in a real estate fund is the tax treatment. Because of Revenue Ruling 2004-86, the IRS does not see you as owning a security. It sees you as owning real estate directly. That distinction is the entire reason DSTs exist, and it is what allows the exchange to work.

How a DST is put together

A sponsor, usually a large real estate firm, identifies and buys a property. Common types include apartment communities, medical office buildings, industrial distribution centers, self-storage facilities, and single-tenant net-lease buildings occupied by companies like pharmacies or dollar stores.
The sponsor places the property into a Delaware Statutory Trust and arranges long-term, fixed-rate, non-recourse financing at the trust level. Non-recourse means you are not personally liable for the loan.
The trust is divided into beneficial interests and offered to accredited investors through a private placement memorandum, a document that runs a hundred pages or more and discloses every fee, projection, and risk. It is genuinely worth reading, and it is our job to read it with you.
You invest exchange proceeds and become a beneficial owner. Because the trust already holds the property, your closing is a matter of days rather than months.
The sponsor operates the property for a period usually running five to ten years, distributes income along the way, and eventually sells.
At sale, you receive your share of the proceeds and may either take the cash and pay the accumulated deferred tax, or roll into another 1031 exchange and keep deferring.

The debt piece matters more than people realize

If your sale paid off a mortgage, you must replace that debt to defer the full tax. DSTs solve this elegantly. Each offering has a published loan-to-value ratio, so you can select one that matches the leverage you need to replace. In the case study on this site, the client exchanged $475,000 into DSTs with roughly 49 percent leverage, which gave him $930,000 of real estate exposure and satisfied the debt replacement requirement at the same time.

Why owners choose them

You stop being a landlord

No tenant calls. No plumbers. No evictions. No lease renewals. No property tax bills arriving twice a year. For someone in their sixties or seventies who has done this for thirty years, this is usually the reason, not the tax.

You diversify

One rental house in one neighborhood is a concentrated bet on one local economy and one tenant. Exchange proceeds can be split across four or five DSTs in different regions and different property types.

The income often goes up

Owners with long-term tenants at below-market rents frequently find that DST distributions exceed what they were netting, particularly once the new depreciation shelter is counted.

The deadlines become manageable

A DST can close in a few days. Naming one as a backup identification means a collapsed primary deal on day 160 does not turn into a six-figure tax bill.

Estate planning gets simpler

Fractional interests divide cleanly among heirs. Three children can each inherit a share of five DSTs without anyone arguing about who has to manage a duplex.

Every dollar gets invested

You can size DST purchases to the dollar. Buying a building almost always leaves an awkward remainder that becomes taxable boot. A DST does not.

What you actually receive, and why it is mostly tax-free

Distributions are typically paid monthly. Sponsors project first-year cash distributions in the range of roughly 4 to 6 percent of the amount you invest, though this varies widely with property type and interest rates. These are projections drawn from the sponsor's underwriting, not promises, and they can be cut.

The part that surprises people is the tax treatment. Because the exchange establishes a fresh basis and a new depreciation schedule on your share of the new property, a large portion of what you receive is offset by depreciation on your tax return. It is common for 60 to 90 percent of a DST distribution to be sheltered from current income tax in the early years.

That means a 5 percent distribution can carry an after-tax value closer to what a 7 or 8 percent fully taxable yield would deliver. For a retiree whose pension already pushes them into a high bracket, this difference is substantial. It is also the reason the firefighter in our case study went from about $12,700 of fully taxable net rent to roughly $23,000 a year with about 80 percent of it sheltered.

The seven restrictions the IRS imposes

To keep its favorable tax treatment, a DST trustee is barred from taking seven actions. Practitioners call them the seven deadly sins. They are not trivia. They explain both why a DST is genuinely passive and why a sponsor's hands are tied if something goes wrong.

#	The trustee may not	Why it matters to you
1	Accept new capital once the offering closes	The trust cannot raise money to cover a shortfall
2	Renegotiate the existing loan or borrow new money	Refinancing is off the table, even if rates fall sharply
3	Reinvest proceeds from selling the property	A sale ends the trust. There is no rolling into the next deal inside the DST
4	Make capital improvements beyond normal repairs, legally required work, or work funded by existing reserves	The property cannot be repositioned or substantially upgraded
5	Invest cash between distribution dates in anything but short-term government obligations	Idle cash earns very little
6	Hold cash beyond the next distribution, except for reasonable reserves	Limited buffer for surprises
7	Enter new leases or renegotiate existing ones, except on tenant bankruptcy or default	The single most restrictive rule for net-lease DSTs

Sponsors work around several of these by using a master lease structure, where the trust leases the whole property to an affiliated operating company that then handles day-to-day leasing. This is standard and disclosed, but it is one more layer to understand and one more entity whose performance matters.

What DSTs cost

This is the part of the conversation some advisors skip. We will not.

DST offerings carry upfront costs that are built into the price of your interest. Across the industry these commonly total somewhere in the range of 8 to 12 percent of the amount you invest, covering the sponsor's acquisition fee, offering and organization costs, selling commissions to the broker-dealer distributing the offering, due diligence expenses, and reserves. There are also ongoing asset management fees, property management fees, and a disposition fee when the property sells.

What this means in practice: if you invest $500,000, the amount of capital actually working in the real estate on day one is meaningfully less than $500,000. The projected distributions are calculated on your full investment, so the load shows up as a drag on total return rather than as a line item you feel each month, which is precisely why it deserves attention.

Two questions worth asking about any DST

First, what are the total front-end costs as a percentage of my investment, stated in dollars? Second, how is the person recommending this to me being paid, and would they be paid differently if I chose something else? A fee-only fiduciary advisor should be able to answer both without hesitation. If the answer is vague, that is your answer.

Fees are not automatically disqualifying. Compare them against the alternative honestly: a $300,000 tax bill on a $900,000 sale is a 33 percent immediate loss of capital that never comes back. But the comparison should be made with real numbers on both sides.

The risks, stated plainly

Illiquidity. There is no public market. Secondary sales happen occasionally, at a discount, and are not something to count on. Assume your money is committed until the sponsor sells, which is usually five to ten years and can be longer.
No control. You do not vote on when to sell, how to lease, or what to spend. If you dislike the sponsor's judgment, your only recourse is to wait.
Sponsor risk. You are underwriting a firm as much as a building. Sponsor track records vary widely, and several well-known names had programs that performed poorly through the 2008 to 2010 period.
Leverage. Most DSTs carry mortgage debt. Debt magnifies both returns and losses. A property that loses value can wipe out equity before it touches the lender.
Distributions are not guaranteed. They are projections. They have been reduced and suspended in real programs, including recently in some multifamily offerings underwritten during the low-rate period.
Concentration inside the trust. Many DSTs hold a single property with a single tenant or a single submarket's economics.
Interest rate and refinancing risk. Because the trust cannot refinance, a loan maturing in a bad market can force a sale at a poor time.
Fee drag. Described above. It is real and it is permanent.

None of this makes DSTs a bad choice. It makes them a choice that should be made with clear eyes, sized appropriately, and spread across multiple sponsors and property types rather than concentrated in one offering.

Who should not buy a DST

Anyone who may need the money. If there is a realistic chance you will need this capital within five years, illiquidity is not a theoretical risk.
Anyone who enjoys the work. If you like managing property and the returns satisfy you, keep doing it. The tax tail should not wag the dog.
Owners with a small gain. If your tax bill would be $30,000, paying an 8 to 12 percent front-end load to defer it may not be worth it. Sometimes the right answer is to sell, pay, and move on.
Anyone who cannot tolerate not being in charge. Some people genuinely cannot, and that is worth knowing about yourself before you sign a subscription agreement.
Anyone being rushed. If someone is pushing you toward a specific offering on a deadline, slow down. Legitimate DSTs are always available. There is always another one.

How a DST ends, and what a 721 UPREIT is

Eventually the sponsor sells the property. At that point you have two choices: take your share of the proceeds as cash and pay the tax you have been deferring since your original sale, or roll into another 1031 exchange, either into another DST or into a property, and keep the deferral going.

A third path has become common. Some DSTs are structured so that after a required holding period, typically two years, the property is contributed to the operating partnership of a real estate investment trust in exchange for operating partnership units. This is a Section 721 exchange, often called an UPREIT transaction. It is not taxable at the time it happens.

What a 721 UPREIT gives you

Ownership across an entire REIT portfolio instead of one building
Ongoing deferral of the accumulated gain
Periodic partial liquidity, since units can usually be converted to REIT shares or cash over time, though converting is a taxable event
A much simpler asset for heirs to divide

What it costs you

Your 1031 eligibility ends permanently. Partnership units are not like-kind real property, so no future exchange is possible
You are now exposed to the whole REIT's performance and management, not one property
Converting units to cash triggers the deferred tax at that time
The step-up at death still applies under current law, so holding remains the cleanest ending

The 721 path suits owners whose real goal is to eventually simplify and who accept that this is the last exchange they will do. It does not suit someone who wants to keep the option of exchanging again open.

The full guide to 721 UPREIT exchanges →

How to evaluate a sponsor

The building matters. The sponsor matters more. Questions worth asking about any offering:

How long has this firm sponsored DSTs, and how many full cycles have they completed from purchase through sale?
What happened to their programs during 2008 to 2010, and during the 2022 to 2024 rate increase? Ask for the results, not the story.
Have they ever reduced or suspended distributions? On which programs, and why?
What is the debt on this specific property, when does it mature, and is the rate fixed?
What are the occupancy and rent assumptions in the projections, and how do they compare to the property's actual current numbers?
How much of their own capital is the sponsor leaving in the deal?
What are the total fees, in dollars, on my investment amount?

Our role is to ask these questions on your behalf, read the private placement memorandum with you, and build a mix across several sponsors and property types rather than putting everything into whichever offering happens to be open.

Bottom line

A DST is the tool that turns a 1031 exchange from a theory into something a tired landlord can actually use. It converts a building you manage into income you receive, defers a tax bill that would otherwise take a third of your sale, and requires nothing from you afterward.

It also locks up your money for years, hands control to someone else, and carries real fees and real risk of loss. Both of those things are true at once, and the right answer depends entirely on your situation.

Compare a DST directly against a REIT → · See all six of your options →

Want to see actual offerings before you decide?

On a free call we will review current DST offerings that fit your proceeds and your debt replacement requirement, walk through the fees in dollars, and tell you if we think none of them are a good fit right now.

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