Delaware Statutory Trusts (DSTs): Passive Investing with 1031 Funds

Some investors want the tax benefits of a 1031 exchange but don’t want the headaches of managing property. That’s where Delaware Statutory Trusts (DSTs) come in. These structures allow investors to own fractional interests in large, professionally managed properties while still qualifying for 1031 exchange treatment.

As a realtor, understanding DSTs can help you serve clients who want passive income, diversification, and tax deferral without the day-to-day work of being a landlord. This article explains how DSTs work, their pros and cons, and when they make sense for investors, specifically through a Delaware Statutory Trust arrangement.

What is a DST?

A Delaware Statutory Trust is a legal entity that holds title to one or more pieces of real estate. Multiple investors purchase beneficial interests in the trust, sharing in income, appreciation, and tax benefits proportionally.

DSTs are managed by professional sponsors who handle leasing, maintenance, financing, and eventually selling the property. This makes DSTs appealing for investors who want truly passive real estate ownership, particularly those looking to engage with a Delaware Statutory Trust.

How DSTs Qualify for 1031 Exchanges

Under IRS Revenue Ruling 2004-86, DST interests are treated as direct real estate ownership for 1031 purposes. That means investors can exchange from a traditional property into a DST or vice versa, deferring capital gains taxes along the way. Delaware Statutory Trust rules are crucial for ensuring compliance.

However, the DST itself must meet strict requirements: investors cannot control day-to-day operations, renegotiate loans, or reinvest proceeds after a sale. These rules keep the structure passive and IRS-compliant.

Benefits of DSTs

• Truly passive income with no management headaches.
• Diversification across multiple properties or asset classes.
• Low minimum investments, often $100,000 or less.
• Access to institutional-grade real estate like medical offices or apartment complexes.
• Qualifies for 1031 exchange tax deferral through the use of a Delaware Statutory Trust.

Drawbacks and Risks

• Illiquidity – DST interests can be hard to sell before the trust liquidates.
• No control over management decisions or timing of sale.
• Fees charged by sponsors may be higher than self-managed properties.
• Market risk still applies; values can fall in downturns.

Case Study: Retiree Chooses a DST

Jim owned several rental houses but was tired of midnight maintenance calls and tenant issues. He sold his rentals using a 1031 exchange and invested the proceeds into a Delaware Statutory Trust owning medical office buildings. Now Jim receives steady income without the headaches of property management, and his taxes were fully deferred.

When DSTs Make Sense

• Investors nearing retirement who want passive income.
• Those wanting diversification without direct management.
• Exchangers looking for quick closing options to meet 45-day deadlines using a Delaware Statutory Trust.
• Investors seeking access to large, institutional properties with smaller investments.

Step-by-Step Guide to Investing in a DST

• Step 1: Sell your existing property and start the 1031 exchange process.
• Step 2: Identify DST options within the 45-day window focusing on Delaware Statutory Trusts.
• Step 3: Review offering documents, fees, and projected returns.
• Step 4: Work with your Qualified Intermediary to complete the exchange.
• Step 5: Receive passive income distributions while the DST sponsor manages the property.

Frequently Asked Questions

• Can I exchange from a DST back into traditional property? (Yes, when the DST sells and you start a new exchange.)
• How long do DSTs typically last? (Often 5–10 years before liquidation.)
• Are DST returns guaranteed? (No, they depend on property performance.)
• What happens if the DST sponsor sells early? (You may owe taxes unless you start another 1031 exchange involving Delaware Statutory Trusts.)

Pro Tips for Realtors

• Work with DST sponsors who have strong track records.
• Help clients understand fees, risks, and holding periods related to a Delaware Statutory Trust.
• Use DSTs as backup options if replacement properties fall through.
• Coordinate closely with QIs to meet tight deadlines.

For more information, check out our other articles:

• Turn Your Capital into Passive Income Gold: How Delaware Statutory Trusts Can Supercharge Your 1031 Exchange Strategy
• The Ultimate Delaware Statutory Trust 1031 Exchange Strategy for Passive Income
• Navigating Debt Replacement in 1031 Exchanges: How Delaware Statutory Trusts Can Help
• 1031 Exchange Case Study: Using DSTs to Complete an Exchange
• Can I Use a 1031 Exchange for REITs? Not Directly, But There’s a Workaround