A Delaware Statutory Trust (DST) offers 1031 exchangers a unique path to passive real estate investment. For investors who want to defer capital gains taxes without the responsibilities of active property management, DSTs provide an attractive solution.
What Is a DST?
A Delaware Statutory Trust is a legal entity created under Delaware law that holds title to real estate. Investors purchase beneficial interests in the trust, which qualifies as direct property ownership for 1031 exchange purposes. The IRS confirmed this treatment in Revenue Ruling 2004-86.
Why Consider a DST?
DSTs are particularly appealing for exchangers who are tired of active property management, want to diversify into institutional-quality real estate, need a backup identification option within the 45-day window, or are looking to gradually transition out of real estate ownership.
How DST Rollovers Work
When you sell your relinquished property, your Qualified Intermediary holds the proceeds as usual. You then identify one or more DST offerings as your replacement property. The exchange funds are used to purchase beneficial interests in the DST, completing your 1031 exchange.
Types of DST Properties
DST offerings typically feature institutional-quality assets such as multifamily apartment communities, net-leased retail properties, industrial distribution centers, medical office buildings, and senior living facilities. These are properties that individual investors rarely have access to on their own.
Important Considerations
DST investments are illiquid and typically have holding periods of 5-10 years. Investors cannot actively manage the property or make major decisions about it. Returns are not guaranteed. However, when you eventually sell your DST interest, you can do another 1031 exchange into a new property or DST.
The Backup Strategy
Many experienced exchangers identify at least one DST as a backup option during their 45-day identification period. If their primary replacement property falls through, the DST provides a reliable closing option that prevents the exchange from failing.