How to Use a Delaware Statutory Trust to Invest in Real Estate

Find out how a DST can help investors make use of a 1031 exchange.

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One of the traditional ways to create wealth using real estate is to buy a property, build equity, sell and then move on to a larger property — in many cases using leverage to expand the size and scope of one's real estate holdings. This is why trusts like the Delaware Statutory Trust (DST) or the 1031 tax-deferred exchange are the investor’s best friends. Both allow investors to defer taxes on the capital gains from the sale of properties when they move on to bigger properties. Let's go deeper with DSTs and how to use them.

What Is a DST?

Pros and Cons of Real estateA DST is a legal entity that allows investors to pool money together to purchase fractional ownership of real estate assets. DSTs are derived from Delaware Statutory law as a separate legal entity, created as a trust, which qualifies under Section 1031 as a tax-deferred real estate exchange. A DST provides some attractive benefits over standard 1031 exchanges, including flexibility, limited liability and no landlord responsibilities.

Many DST offerings are syndicated and offer institutional quality such as medical buildings, class A multi-family apartment buildings, hotels, senior living, student housing, and industrial warehouse buildings, with a capitalization of $100 million or more. And many of these properties are rented by nationally known, credit-worthy tenants that often offer corporate guarantees on the lease.

While most of these higher-grade properties are typically out of reach for smaller real estate investors, the DST structure makes it possible to own a fractional share of stabilized cash-flowing residential and commercial properties.

DST vs. The 1031 Exchange Rule

1031 Exchange IRCThe use of the Delaware Statutory Trust (DST) provides greater flexibility and investment choices for investors who would like to use the 1031 exchange.

While the use of 1031 has been a staple for investors for decades, the rules associated with properly doing a standard 1031 exchange pose a few problems for investors.

  1. For one, it’s difficult to properly execute a 1031 exchange within the IRS-imposed time deadline: you have to identify the replacement property within 45 days and buy it within 180 days of closing on the property you’re selling. That can happen if everything goes well, but there are so many opportunities for a real estate transaction to become delayed. As a result, investors are at a high risk of missing out on the 1031 exchange tax deferral benefit.
  2. Additionally, a standard 1031 exchange means the investor continues an active role in property management and retains liability associated with owning a property outright.

How the DST works

  1. Setting Up the DST — A real estate sponsor firm will set up the DST and act as the “master tenant” to acquire properties under the DST umbrella. As a trust (rather than an LLC or partnership), the DST is very simple and inexpensive for the sponsor to create and operate.
  2. Naming a Trustee — The sponsor names a trustee who will have sole authority to manage the business and assets of the trust. The trustee has a fiduciary responsibility to the beneficial owners as fractional owners.
  3. Funding the Trust — The trust collects the investment money and arranges the necessary financing on behalf of the trust. The trust itself holds direct ownership of the assets and the individual investors own an interest (or share) in the trust. The trust provides limited liability to the trustees, managers, and beneficial owners of the trust, and is very simple and inexpensive for the sponsor to create and operate.

DSTs are a very efficient form of fractional real estate ownership. The DST becomes the LLC that owns the properties and investors retain beneficial interest including pass-through income and tax benefits. Other forms of ownership, such as Tenants in Common (TIC) partnerships, which rely on setting up individual LLC’s for each investor and obtaining financing on an owner by owner basis, can be cumbersome to manage.

Pros and Cons of Using a Delaware Statutory Trust 


  • Immediate access: Alleviates the stress of meeting the two deadlines of a standard 1031 exchange by providing immediate access to pre-qualified like-kind properties.
  • Can invest in institutional-grade offerings with limited funds: Most DST investments are assets that small- to mid-sized accredited investors could not otherwise afford. By pooling money with other investors, you can acquire an interest in large professionally managed properties such as a 500-unit apartment complex.
  • Instant diversification into all properties held in the DST: In a standard 1031 exchange, you are buying one replacement property with no diversification of real estate type or location.
  • Outsource the property management: No need to shoulder the responsibility of being a  landlord and dealing with tenant issues.
  • Closed-end fund setup: Once the number of investors limit is reached and properties are secured, the DST is closed and no other investors can be added to dilute the value of previous investor interests.
  • SEC-regulated: There is some assurance of compliance with best investor policies. DSTs are regulated by the SEC and can only be purchased through a licensed investment advisor.
  • Limited Liability: The DST owns the properties and shoulders liability responsibilities, while investors retain a beneficial interest including pass-through income and tax benefits.
  • Non-recourse debt: The DST sponsor company obtains institutional financing on the properties. That debt is non-recourse to the individual DST investors, but satisfies the debt-replacement requirements of the 1031 exchange as well as providing write-offs of the interest payments.


  • Loss of control: All property decisions are made by the DST manager; individual investors don’t get to decide when to sell or how to manage the properties. (Giving away control to a qualified DST manager is also a pro for many investors tired of being landlords and looking for a truly passive investment.)
  • Required accreditation: You need to be an accredited investor to qualify for a DST share.
  • High cost: There is a minimum investment of $100,000, which may be too high for many investors.
  • Illiquid investment: Real estate is, by nature, an illiquid asset and the same goes for DST investments. There’s no official secondary market if you want to sell your interest (although a few sites like this one offer a marketplace for DST purchases and sales).
  • Could impact returns: Since the DST is closed once fully funded and not raising any more money, some of your investment may be held in reserve for property management and administrative costs. This could affect total return expectations because a portion of the investment funds may be held back instead of going directly into investment opportunities.

Looking for ways to fund your real estate investments? Here are some options:

Standard vs DST vs TIC 1031 Exchanges Compared

While all three of these 1031 exchange options offer capital gains tax deferral, have the same 45-day identification period and 180-day replacement property acquisition deadline, and require a qualified intermediary to handle the transaction, there are some important distinctions:

 1031 Standard ExchangeDST (Delaware Statutory Trust) 1031 ExchangeTIC (Tenants In Common) 1031 Exchange
Must be an accredited investorNoYesNo
OwnershipInvestor owns property outrightDST owns properties and investors retain beneficial interest including pass-through income and tax benefitsUndivided tenants in common interest (each investor owns an undivided, pro-rata share of the title to the property)
DiversificationLimited to one exchanged propertyAllows broad diversification in all properties held in DSTAllows diversification in all properties held in TIC (typically less than DST)
Closing CostsTypically 5-8% of the purchase price$0Typically $2,500 – $5,000
Minimum InvestmentSpecific to replacement property valueUsually $100,000Usually $500,000
Investors Receive Property DeedYesNoYes
Legal StructureLLC or individual ownership (decided by the investor)TrustIndividual LLC set up for each investor
Major property decisions made by?Individual investors on property deed make unanimous decisionsDST manager makes all decisions (one decision-maker)Unanimous co-owner approval required (up to 35 decision-makers)
Number of InvestorsAll individuals on property deedTypically 100 (but not strictly defined as such by IRS code)Up to 35
Individual Investor Liability1None1
IRS guidelinesIRC Section 1031Rev. Rule 2004-86Rev. Proc. 2002-22
Due DiligenceDue diligence on the property is keyDue diligence on DST manager is keyDue diligence on co-owners and the trustee is key
Regulated by SEC?NoYesYes

A DST Real-Life Example

Justin Kiehne, a financial advisor with Fortitude Investment Group, said that DSTs are often used by investors who want to retire and no longer bother with being a tenant.

Many of our clients are older investors who have built wealth through real estate over many years,” Kiehne said. “They view the DST as a retirement and estate planning tool as they enter the next stage of their life and no longer want to be bothered by toilets, tenants, and trash. We also see the DST used as a turnkey back-up option in the 1031 exchange. Justin Kiehne


Here’s an example of how a DST is typically used: Joe, an investor, purchased a single-family rental property for $100,000 in 2001. The property’s fair market value now, 20 years later, is $250,000.

Selling Investment PropertyJoe would like to sell the property in order to invest in a larger real estate project, such as a multifamily unit. If Joe sells the property without doing an exchange, he’s liable for capital gains taxes on  $150,000 as well as depreciation recapture taxes on depreciation tax credits he’s taken each year which amount to $100,000 (20 years at $5,000/year).

Instead of selling the property and owing capital gains taxes on $250,000, Joe could go out and find a like-kind replacement property and do a 1031 exchange. But he’s concerned about the tight deadlines of finding a like-kind property in 45 days and closing on it within the 180-day deadline. Most importantly, Joe is tired of being a landlord and would rather own real estate as a passive investor.

Joe chooses to purchase fractional ownership in an established DST that’s investing in a 210-unit apartment complex. He passes the management and control of the property to the DST manager, but still retains the tax-favored income that comes with owning income-producing real estate.

Since the DST is a pass-through entity and fractional owners are allowed to participate in depreciation and amortization, Joe is able to shelter not only his original gains, but also much of his monthly DST income in the same way he did when he was both direct owner and manager of the property he sold.

DST Risks

Like any security or real estate investment, DSTs come with risk. Institutional investments can experience high vacancy rates and loan defaults. Investors should:

  1. Perform due diligence on the DST management
  2. Research the specific properties the DST invests in
  3. Read the Private Placement Memorandum (PPM) — the legal document that discloses what an investor should know to make an informed decision — before investing.

DSTs are regulated as securities and must be purchased from a registered investment advisor who holds a Series 7 or Series 65 license. The DST structure might be a viable and preferred investment alternative, but it’s important that you consult your tax advisor before you jump in.

Bottom Line: Should You Invest in a DST? 

A DST investment is ideal for a real estate investor who wants to sell an investment property while deferring capital gains and moving into a passive investment management role. In addition to deferring capital gains, the 1031 exchange may also allow the seller of a property to defer depreciation recapture taxes.

The DST may also be a good choice for someone who wants exposure to an alternative investment class such as real estate, without the responsibilities or liabilities involved in owning real estate outright.

Ruth Lyons

Trading three decades of financial publishing experience in the corporate world for a life of personal and financial freedom as a freelancer in 2012, Ruth is passionate about helping others take control of their personal finances and to become aware and educated on their options as self-reliant individuals. Disenfranchised with the high cost and lackluster performance of her IRA, college savings and other retirement accounts handled by a full-service broker, Ruth moved her retirement money to a self-directed IRA in 2015. Ruth holds an MS in Finance from Johns Hopkins Carey School of Business (1991) and a Business Management degree from University of Maryland (1984). You can follow Ruth on: Twitter

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