DST / Delaware Statutory Trust

Written by Toni Sutherland, Investment Advisor / 1031 Exchange & DST Specialist

Series 7, Series 63, Series 65 · CRD #2729672 · Securities offered through Emerson Equity LLC, Member FINRA/SIPC

Published July 6, 2026 · Last reviewed August 30, 2026

A Delaware Statutory Trust is a trust that holds title to income-producing real estate and sells fractional beneficial interests in itself to investors. Because the IRS treats those interests as a direct interest in the underlying real estate, a DST can be used as replacement property in a 1031 exchange. That single point of tax treatment is why the DST has become the most common way a smaller investor completes an exchange into institutional real estate.

What a Delaware Statutory Trust actually is

A DST is a separate legal entity formed under the Delaware Statutory Trust Act, codified at 12 Del. C. 3801 and following. Delaware law gives the trust a distinct legal existence, meaning it can hold title to property, borrow, contract, and sue or be sued in its own name. The trust is created by a governing trust agreement and a certificate of trust filed with the Delaware Secretary of State. A property does not have to be located in Delaware, and investors do not have to live there. The state simply supplies the statute the entity is organized under, which is the same reason so many operating companies are incorporated there.

In practice a real estate sponsor forms the trust, acquires a property or portfolio, arranges any financing at the trust level, and then offers beneficial interests to investors. Each investor becomes a beneficial owner of the trust in proportion to the amount invested. The investor's name does not appear on the deed. The trust holds title, and the beneficial interest is the investor's asset.

Why a DST qualifies for a 1031 exchange

Section 1031 of the Internal Revenue Code permits deferral of capital gains when real property held for investment or productive use in a trade or business is exchanged for like-kind real property. The requirement that matters here is that what you buy has to be real property. An interest in a partnership, an LLC taxed as a partnership, or a corporation is an interest in an entity, not in real estate, and Section 1031(a)(2) expressly excludes partnership interests. That is why a REIT share cannot be used to complete an exchange.

IRS Revenue Ruling 2004-86, issued in 2004, resolved the question for trusts. It holds that where a Delaware Statutory Trust is structured so the trustee has only limited powers and cannot vary the investment, the trust is treated as an investment trust rather than a business entity, and each beneficial owner is treated as owning an undivided fractional interest in the underlying real estate directly. The consequence is the whole reason the industry exists: a taxpayer may exchange out of a directly owned property and into a DST interest, and defer the gain.

This is a genuine ruling of general applicability rather than a private letter ruling, so it can be relied on by any taxpayer whose facts match. It is also narrower than it first appears. The treatment holds only while the trust stays inside the restrictions the ruling describes. A trustee who exceeds them converts the trust into a business entity for tax purposes, and the beneficial interests stop being real property. An exchange completed into a trust that later fails this test is exposed.

The seven restrictions a DST trustee operates under

Revenue Ruling 2004-86 limits what a DST trustee may do. The industry calls these the seven prohibitions, or, less formally, the seven deadly sins. They are the reason a DST is genuinely passive, and they are also the source of most of its limitations.

1. No new capital after closing. Once the offering closes, the trust cannot accept additional contributions from current or new investors.
2. No refinancing. The trustee cannot renegotiate the terms of existing debt or borrow new funds, except where a tenant is bankrupt or insolvent.
3. No reinvesting sale proceeds. Proceeds from a sale must be distributed to investors. The trustee cannot recycle them into another property.
4. Capital expenditure is limited. Spending is limited to normal repair and maintenance, minor non-structural work, and anything required by law.
5. Cash is held in short-term obligations. Between distribution dates, liquid reserves may only sit in short-term debt obligations.
6. Cash must be distributed. All cash beyond necessary reserves must be distributed to investors on a current basis.
7. No renegotiating leases. The trustee cannot enter into new leases or renegotiate existing ones, again except in a tenant bankruptcy or insolvency.

Read together, these rules say the trust exists to hold a defined asset for a defined period and hand the cash through to its owners. It cannot adapt, expand, or reposition. That rigidity is what earns the favorable tax treatment, and it is also the honest answer to why a DST offers no flexibility once you are in it. A sponsor facing a problem the restrictions do not permit it to solve has one common remedy, a conversion of the trust into an LLC, generally called a springing LLC. That conversion protects the asset but ends 1031 eligibility for the interest going forward, which is a scenario worth asking any sponsor about directly.

How a DST investment works, step by step

1. You sell your relinquished property. Proceeds go to a qualified intermediary at closing, never to you. Taking receipt of the funds ends the exchange.
2. You identify replacement property within 45 days. Identification is in writing, signed, and delivered to the intermediary. The deadline is calendar days from closing, with no extension for weekends or holidays.
3. You review available DST offerings. Each comes with a private placement memorandum setting out the property, the sponsor, the debt, the fees, the projected hold, and the risks. This is the document that matters, and it should be read in full.
4. You subscribe. You complete subscription documents, verify accredited investor status, and the intermediary sends exchange funds directly to the trust.
5. You close within 180 days. Because the sponsor has already acquired and financed the property, closing into a DST is generally a matter of paperwork rather than a negotiation.
6. You hold a passive interest. Any distributions are paid on the schedule the offering sets out. You receive tax reporting annually and your basis carries over from the relinquished property.
7. The sponsor eventually sells. Proceeds are distributed. You can pay the deferred tax at that point, or exchange again into new replacement property.

What DSTs hold

DSTs generally hold institutional-grade, income-producing commercial real estate of a size an individual investor could not buy alone: multifamily apartment communities, medical office and clinical buildings, industrial and distribution facilities, self-storage, student housing, single-tenant net-lease retail, and senior housing. Some hold a single asset, others a portfolio across several markets. Property type, market, tenant credit, lease structure, and leverage vary enormously between offerings, and two DSTs are not interchangeable simply because both are DSTs.

Today about 90% of all securitized real estate offerings represented by Alta Investment Group for 1031 exchanges are DSTs. That share reflects how completely the structure displaced the alternatives after 2004.

DST compared with TIC and direct ownership

There are three practical ways to hold 1031 replacement property. The differences are structural, not a matter of quality, and each suits a different investor.

For a fuller treatment of the first two columns, see DST vs TIC compared. For the third, see direct investment via an LLC.

Where a DST fits in the exchange timeline

The 45-day identification deadline is the point at which most exchanges fail. Finding, negotiating, and getting a whole property under contract inside 45 calendar days is difficult, and a lender who moves slowly can end the exchange on its own. A DST is already acquired, financed, and closed before it is offered, so identifying one is an administrative act rather than a transaction.

That property is used two ways. Some exchangers go into a DST as the intended destination, because they want a passive interest. Others identify a DST as a backup alongside the property they actually want, so that if the primary purchase collapses, the exchange still completes and the gain stays deferred rather than becoming immediately taxable. A DST is also frequently used to absorb residual exchange proceeds, the leftover amount that would otherwise be taxable boot when the replacement property costs slightly less than the relinquished one.

Who can invest

DST interests are securities offered under Regulation D, so they are available to accredited investors. Accreditation is generally established by income, over 200,000 dollars individually or 300,000 dollars jointly in each of the two most recent years with the same expectation for the current year, or by net worth over 1,000,000 dollars excluding your primary residence, or by holding certain professional securities licenses. Entities qualify on separate tests. The accredited investor guide covers how each test is documented and what a sponsor will ask you to verify.

What to weigh before investing

A DST is a real estate investment and carries the risks of one, plus several specific to the structure. These are the ones worth raising with an advisor before you subscribe.

• Illiquidity. There is no public secondary market for DST interests. You should expect to hold for the full life of the offering, and the sale date is the sponsor's decision.
• No control. The same restrictions that make the structure work also mean you cannot vote on leasing, financing, or the timing of a sale.
• Sponsor dependence. Your outcome is tied to the sponsor's underwriting, operations, and disposition judgment. Track record, depth, and how they have handled troubled assets are legitimate diligence questions.
• Leverage. Most DSTs carry non-recourse debt at the trust level. That debt is what allows an exchanger to replace the debt on the relinquished property, and it also amplifies outcomes in both directions.
• Fees. Offerings carry acquisition, organizational, and ongoing costs disclosed in the private placement memorandum. Read the fee table before the projections.
• Tenant and market risk. Occupancy, tenant credit, and local market conditions drive results. Distributions are not guaranteed and can be reduced or suspended.
• Structural risk. If the trust is compelled to convert to an LLC to address a problem the seven restrictions forbid it from solving, 1031 eligibility for the interest ends.

Delaware Statutory Trust questions, answered

Sources

• IRS Revenue Ruling 2004-86, 2004-33 I.R.B. 191, on the treatment of a Delaware Statutory Trust beneficial interest under Section 1031.
• Delaware Statutory Trust Act, 12 Del. C. 3801 et seq.
• Internal Revenue Code Section 1031, and Section 1031(a)(2) on excluded interests.
• IRS Revenue Procedure 2002-22, on undivided fractional interests in rental real property.
• Regulation D, 17 CFR 230.501, on accredited investor status.

Learn more

• DST vs TIC compared
• DST pros and cons
• TIC / DST investments
• How a 1031 exchange works
• The 1031 IRS code
• Accredited investor guide
• Passive income real estate
• DST Plus and the Deferred Sales Trust
• 1031 exchange glossary