1031 DST

What Is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust (DST) is a legal entity formed under Delaware law that owns one or more income-producing real estate assets. Investors purchase beneficial interests in the trust, which—when structured correctly—qualify as like-kind replacement property for a 1031 exchange. In simple terms:

• The DST owns the real estate
• You own a fractional interest in the trust
• A professional sponsor and management team handle leasing, financing, maintenance, and operations
• You remain a passive investor, receiving potential income and tax deferral without day-to-day management

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How a 1031 DST Exchange Differs From a Traditional 1031 Exchange

Traditional 1031 Exchange (Direct Ownership)

In a standard 1031 exchange, you sell a property and reinvest into another property you directly own and control, such as:

• Multifamily
• Self-storage
• Retail, office, or industrial
• Mobile home parks
• Investment land

You (or your property manager) make all key decisions—operations, renovations, refinancing, and when to sell.

1031 Exchange Into a DST (Passive Ownership)

With a DST exchange:

• You sell your relinquished property
• Identify one or more DST offerings as replacement property
• Purchase DST interests to complete the exchange
• The sponsor manages the asset; you do not control daily operations

The trade-off is less control in exchange for significantly less responsibility.

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The Key Benefits of a 1031 DST Exchange

1) Passive Ownership With Less Landlord Stress

DSTs appeal to investors who want real estate exposure without active management. If you’re ready to step away from:

• Tenant issues and turnover
• Maintenance and capex oversight
• Property management coordination DSTs can provide a hands-off alternative while keeping capital invested in real estate.

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2) Easier Execution Under Tight 1031 Timelines

1031 exchanges come with strict deadlines:

• 45 days to identify replacement property
• 180 days to close

DSTs are often pre-packaged, ready-to-close investments, making them especially helpful when timing, financing, or market competition makes direct acquisitions difficult.

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3) Built-In Diversification

Rather than exchanging into a single property, DSTs allow investors to split proceeds across multiple assets, which may include:

• Different geographic markets
• Multiple property types
• Varying tenant profiles and lease structures

This can help reduce concentration risk—especially if most of your net worth is tied to one asset or market.

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4) Access to Institutional-Grade Real Estate

DSTs often hold larger, professionally managed properties—assets that may be difficult to acquire independently. These can include:

• Large apartment communities
• Industrial or logistics facilities
• Long-term leased net properties

Investors gain exposure to scale, professional reporting, and institutional operations.

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5) Useful for Partial or “Gap” Exchanges

DSTs are frequently used to absorb leftover exchange proceeds that might otherwise become taxable boot—especially when a direct replacement doesn’t perfectly match the sale price or equity.

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Key Trade-Offs and Risks to Understand

DSTs can be powerful tools, but they’re not one-size-fits-all.

1) Limited Liquidity

DST interests are illiquid. Most are designed for multi-year hold periods, with liquidity typically occurring only when the sponsor sells the property.

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2) No Operational Control

Unlike direct ownership, you generally cannot decide:

• When to renovate
• Whether to refinance
• When to sell
• How aggressively to raise rents

Those decisions rest with the sponsor.

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3) Sponsor Quality and Fees Matter

DST offerings vary widely. It’s critical to evaluate:

• Sponsor experience and track record
• Property quality and location
• Leverage and debt terms
• Cash flow assumptions
• Fees and expense structure

A DST is only as strong as its underlying deal and operator.

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4) Structural Flexibility Is Limited

DSTs operate under IRS guidelines that restrict certain actions (such as new financing or material changes) to preserve 1031 eligibility. That stability can be a benefit—but it also limits flexibility.

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Who a 1031 DST Exchange Is Typically Best For

DST exchanges are often a good fit if you:

• Want passive ownership and fewer management responsibilities
• Need a clean solution under tight exchange timelines
• Prefer diversification over a single replacement asset
• Are transitioning toward estate simplicity or reduced involvement
• Want exposure to larger, professionally managed properties

They may be less suitable if you prioritize hands-on control, active value-add strategies, or near-term liquidity.

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How the Process Typically Works (High Level)

1. Sell your relinquished property
2. Use a Qualified Intermediary (QI) to hold exchange proceeds
3. Identify replacement options within 45 days (DSTs included)
4. Purchase DST interests (or a mix of DST and direct property)
5. Close within 180 days to remain 1031-compliant

DSTs can serve as the full replacement or one component of a broader exchange strategy.

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Frequently Asked Questions

Is a DST exchange a “real” 1031 exchange? Yes. The IRS recognizes properly structured DST interests as like-kind replacement property. Can I invest in multiple DSTs in one exchange? Often, yes—many investors do this specifically for diversification. Can I refinance or force a sale in a DST? Generally, no. Those decisions are controlled by the sponsor. Do DSTs guarantee returns? No. Performance depends on property operations, expenses, financing, management, and market conditions—like any real estate investment.

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Final Thoughts

A 1031 DST exchange can be an effective way to defer taxes while transitioning into more passive, diversified real estate ownership. The key is understanding the trade-offs—particularly around liquidity, control, and sponsor quality—and aligning the strategy with your long-term goals. If you’re considering a 1031 exchange, it’s wise to coordinate early with your CPA, Qualified Intermediary, and an advisor familiar with DSTs and replacement-property strategy to ensure proper structuring, identification, and execution