Delaware Statutory Trusts (DSTs): What They Are, How to Use Them, and Why They Matter for Real Estate Investors

For real estate investors, the goal is often twofold: grow wealth and preserve it.
One increasingly popular tool for achieving both is the Delaware Statutory Trust (DST).
If you’re thinking about selling an investment property but don’t want to take on another active management role—or you want to defer capital gains taxes without sacrificing returns—understanding DSTs could open new opportunities for you.

What Is a Delaware Statutory Trust?

A Delaware Statutory Trust is a legal entity created under Delaware law that allows multiple investors to own fractional interests in one or more pieces of real estate. The trust itself holds title to the property, and each investor holds a “beneficial interest” in the trust.

Key Point: DSTs are passive investments—you do not manage the property, deal with tenants, or handle repairs. Instead, a professional sponsor or management company oversees operations.

Why Investors Use DSTs

1. 1031 Exchange Tax Deferral

   • Under IRS Revenue Ruling 2004-86, DSTs qualify as “like-kind” property for 1031 exchanges.

   • This means you can sell an investment property, invest the proceeds in a DST, and defer paying capital gains tax.

2. Passive Ownership

   • Great for investors who are ready to step away from hands-on management but still want rental income.

3. Portfolio Diversification

   • Many DSTs invest in multiple properties across various states and sectors (e.g., multifamily, retail, industrial).

   • This spreads risk beyond a single property or location.

4. Access to Institutional-Grade Assets

   • DSTs can hold high-value commercial properties (think $50M+ apartment complexes or medical facilities) that individual investors couldn’t easily buy alone.

5. Predictable Income Stream

   • Most DSTs are designed to produce steady, predictable monthly or quarterly distributions.

6. Estate Planning Advantages

   • Because DST interests can be divided among heirs, it’s easier to pass on than a single property.

How a DST Works in Practice

When you invest in a DST, you’re essentially buying a share of a professionally managed property portfolio.

Example:

• The DST owns a Class A apartment building in Dallas, a retail center in Phoenix, and an industrial warehouse in Atlanta.

• You purchase a beneficial interest worth $500,000 using proceeds from the sale of your own rental property.

• The DST collects rents, pays expenses, and distributes your share of net income proportionally to your ownership percentage.

Step-by-Step: How to Use a DST in a 1031 Exchange

1. Sell Your Investment Property

• Work with your Realtor to list and sell your current property.

• The proceeds from the sale must go directly to a Qualified Intermediary (QI)—you cannot take possession of the funds.

2. Identify DST Investments Within 45 Days

• IRS rules for a 1031 exchange require you to identify potential replacement properties within 45 days of closing the sale.

• Your securities advisor will present DST offerings that fit your goals, risk tolerance, and investment amount.

3. Review and Select a DST

• Read the Offering Memorandum carefully—it will outline:

  • Property type(s)

  • Geographic location(s)

  • Targeted income yield

  • Exit strategy and timeline

  • Fees and expenses

  • Risk factors

4. Complete the Subscription Process

• Sign the subscription agreement and other legal documents.

• Funds are wired from your QI to the DST sponsor.

5. Close Within 180 Days

• You must complete the DST purchase within 180 days of selling your original property to qualify for the tax deferral.

6. Receive Income Distributions

• Once invested, you’ll typically receive monthly or quarterly income directly to your bank account.

Why a DST Might Be Right for You

• You’re retiring or downsizing from active property management but want to keep earning rental income.

• You’re selling an appreciated property and want to defer capital gains taxes via a 1031 exchange.

• You want diversification but don’t want the work of managing multiple properties yourself.

• You want estate planning simplicity, allowing your heirs to inherit fractional ownership without needing to manage physical property.

Risks to Keep in Mind

• Illiquidity – You generally can’t sell your DST interest until the trust sells its properties (often 5–10 years).

• Market Risk – Property values and rental income can go up or down.

• No Control – You have no decision-making power over the properties or management.

• Fees – Professional management comes with costs that can impact returns.

Getting Started with a DST

1. Talk to Your Real Estate Agent (That’s Me!) – We’ll review your current property and timeline.

2. Engage a Qualified Intermediary – Required for any 1031 exchange.

3. Work with a Securities-Licensed Advisor – They’ll present approved DST offerings.

4. Coordinate the Exchange – I’ll work alongside your QI and advisor to make sure deadlines are met and the process is smooth.

Bottom Line:
A Delaware Statutory Trust can be a smart move for investors looking to combine tax benefits, passive income, and diversification—especially if you’re transitioning out of hands-on property ownership. With the right team and careful selection, a DST can help you keep your money working for you without the headaches of being a landlord.

📞 Thinking about selling your investment property?
Let’s talk about whether a DST could be the right 1031 exchange strategy for you.