What Is DST (Delaware Statutory Trust)?
A DST is a fractional ownership vehicle built for 1031 exchanges. You sell your rental, and instead of buying another property yourself, you buy a beneficial interest in a DST that holds institutional-grade real estate—multifamily, senior living, retail, office. The qualified intermediary holds your sale proceeds and uses them to purchase your DST interest. You get tax deferral, passive income, and zero landlord duties. The trade-off: you give up control. The sponsor manages everything. You can't force a sale, refinance, or change the lease. IRS rules (Revenue Ruling 2004-86) lock the DST into a passive structure—no new capital, no major renovations, no refinancing. It's hands-off by design.
A DST (Delaware Statutory Trust) is a legal structure that lets multiple investors own fractional interests in a single property—and use that interest as 1031 exchange replacement property to defer capital gains.
At a Glance
- What it is: A trust that holds real estate; investors own fractional beneficial interests.
- Why it matters: Lets you complete a 1031 without buying another property yourself.
- Best fit: Investors who want to defer gains but don't want to manage another rental.
- Trade-off: Passive by design—no control over sale, refinance, or major changes.
How It Works
Formation. A sponsor forms a DST under Delaware law and acquires a property (or properties). Investors buy beneficial interests. For tax purposes, the DST is treated as a grantor trust—you're considered a direct owner of the underlying real estate. That's what makes it like-kind for 1031.
The 1031 flow. You sell your relinquished property. Your qualified intermediary holds the proceeds. You identify the DST interest as your replacement property within 45 days. The QI uses your proceeds to buy your interest. You've deferred capital gains and depreciation recapture.
The seven restrictions. To keep 1031 qualification, the DST must follow IRS rules: no reinvestment of sale proceeds into new acquisitions, capital expenditures limited to repairs and compliance, reserves in short-term investments, cash distributions at least quarterly, lease changes only if the tenant is insolvent, no refinancing or new debt, no additional capital after the offering closes. That means the property is essentially frozen. No value-add plays. No forced appreciation. You're along for the ride.
Real-World Example
Patricia: Tired of toilets, wants out.
Patricia sells a 12-unit in Cleveland for $1.2M. She has $380,000 in equity and doesn't want another property to manage. She identifies a DST holding a 200-unit apartment complex in Austin. Her QI uses her proceeds to buy a $380,000 beneficial interest. She gets monthly distributions, no calls at 2 a.m., and her capital gains are deferred. Two years later, the sponsor sells the Austin property. Patricia receives her share of the sale proceeds. She can 1031 again into another DST or a direct purchase—or pay the tax and walk away. The DST bought her time and peace of mind.
Pros & Cons
- Defers capital gains and depreciation recapture on your sale.
- Truly passive—no management, no tenant calls, no repairs.
- Access to institutional-grade assets you couldn't buy alone.
- Diversification across property type and geography.
- Simplifies estate planning (beneficial interests are easier to transfer).
- No control—you can't force a sale, refinance, or change strategy.
- Illiquid—hard to exit before the sponsor sells the property.
- Sponsor risk—you're betting on their underwriting and management.
- Fees and expenses reduce your net return.
- Limited upside—no value-add, no forced appreciation.
Watch Out
- Sponsor risk: You're trusting the sponsor's underwriting. Bad acquisition? You're stuck. Vet the sponsor's track record and property selection.
- Illiquidity risk: DST interests don't trade on an exchange. If you need cash before the sponsor sells, options are slim. Some secondary markets exist; expect a haircut.
- Identification risk: DST offerings come and go. You must identify within 45 days of your sale. If no suitable DST is available, you may need to pivot to a direct purchase.
- Concentration risk: One DST, one property. Diversify across multiple DSTs or mix with direct ownership if your exchange is large.
Ask an Investor
The Takeaway
A DST is the "I'm done with landlording" 1031 option. You defer taxes, go passive, and own a slice of institutional real estate. The price is control. You can't sell when you want, refinance, or force improvements. The IRS rules lock the structure. If that trade-off works for you—and you trust the sponsor—a DST can be a clean exit from active management. If you want to keep your hand on the wheel, buy another property directly.