Delaware Statutory Trust (DST) in a 1031 Exchange

What a DST is and why it qualifies

A Delaware Statutory Trust is a legal entity that holds title to commercial real estate. Investors buy beneficial interests — fractional ownership stakes — rather than direct title to the property. Since IRS Revenue Ruling 2004-86, beneficial interests in a properly structured DST are treated as direct interests in real property for purposes of Section 1031, which means they can serve as your replacement property in a like-kind exchange.¹

In practice, a real estate sponsor acquires an institutional property (multifamily apartment complex, net-lease medical or retail building, industrial facility, or similar) and sells fractional interests to multiple investors simultaneously. Investors get passive income from the property's cash flow without managing tenants, maintenance, or financing.

When a DST makes sense over direct replacement property

The 45-day identification window and the 180-day closing deadline create real pressure. Direct replacement properties can fall through, take longer to close, or simply not exist at an acceptable price when you need them. DSTs are typically pre-funded and available on demand, which is why they attract investors in three situations:

The Seven Deadly Sins: what DST investors cannot do

Revenue Ruling 2004-86 established a list of restrictions — widely called the Seven Deadly Sins — that a DST must observe to maintain its qualified-intermediary status. These restrictions mean that once you invest in a DST, you give up every decision right:¹

1. No new contributions. After the initial offering closes, no additional capital can be added by existing or new investors.
2. No refinancing. The trustee cannot renegotiate loan terms or take on new debt, except to prevent a default when the property is in financial distress.
3. No reinvestment of sale proceeds. If the property is sold, all proceeds must be distributed to investors — the trustee cannot recycle the capital into a new property inside the same DST.
4. No capital improvements. Expenditures are limited to ordinary repairs and maintenance. You cannot fund a renovation or reposition the property.
5. No new leases or renegotiation. Existing leases can continue but the trustee cannot sign new leases or materially change existing ones without prior IRS guidance.
6. Pro-rata distributions only. Every distribution must be made proportionally to ownership percentage — no preferential treatment across investors.
7. No investment discretion. The trustee cannot vary the investment on behalf of certificate holders. The investment is what it is until the property is sold.

These restrictions explain why DSTs work well for stabilized, long-term-leased properties with predictable cash flows — and why they are a poor fit for value-add projects, properties with near-term lease rollovers, or situations where you expect to need refinancing.

Who can invest: accredited investor requirements

DST interests are securities offered under Regulation D, which means investors must meet the SEC's accredited investor definition:²

Most 1031 exchange investors considering a DST already meet the net worth threshold by virtue of the appreciated property they are selling. Minimum investment amounts typically run $100,000 to $250,000 per offering, though some sponsors set floors as high as $500,000.

DST vs. direct replacement: a side-by-side comparison

A worked example: when DST defers real money

Consider an investor selling a multifamily property for $2,400,000 with an adjusted basis of $550,000 and accumulated depreciation of $380,000:

• Realized gain: $1,850,000
• Federal tax if sold taxable: depreciation recapture ($380K × 25% = $95K) + long-term capital gains ($1,470K × 20% = $294K) + NIIT ($1,850K × 3.8% = $70K) ≈ $459,000 in federal tax before state
• Exchange defers all of this into a DST — passive income from day one, no tenants to manage, no maintenance calls

The investor stays fully invested, defers six figures in tax, and exits active management in one transaction. That is the appeal. The risk is that the replacement DST may not perform as projected, debt terms are fixed, and liquidity is effectively locked until the sponsor sells the underlying property (typically 5–10 years).

OBBBA and the current 1031 landscape (2026)

The One Big Beautiful Bill Act (July 2025) left Section 1031 like-kind exchange rules entirely intact — no dollar cap, no income limit, no restriction on how many exchanges an investor can complete. The OBBBA also restored 100% bonus depreciation permanently for qualifying property placed in service after January 19, 2025, which affects how a financial advisor models cost segregation on replacement property.³

What a financial advisor does in a DST evaluation

A qualified intermediary keeps the exchange compliant. A real estate broker finds properties. A CPA estimates tax. A fee-only financial advisor does the work none of those professionals are set up to do:

1. Model the full decision. Compare taxable sale, direct exchange, DST, partial exchange, and charitable strategies against the household balance sheet — not just the tax math, but retirement income, estate plan, and portfolio concentration.
2. Stress-test the DST sponsor and offering. Evaluate the track record, property quality, debt structure, projected distributions, and what happens if the property underperforms or the market shifts before the hold period ends.
3. Evaluate liquidity and estate implications. A DST interest passes to heirs with a stepped-up basis at death, which can eliminate the deferred gain entirely. Whether that makes sense depends on age, estate size, and income needs between now and death.
4. Coordinate the team. Align the financial plan with the CPA, qualified intermediary, estate attorney, and lender before money moves.

Run the 1031 exchange calculator to estimate how much tax you might be deferring, then use the form below to get matched with an advisor who can evaluate whether a DST, direct replacement, or taxable sale makes sense for your specific situation.

Sources

1. IRS Revenue Ruling 2004-86 — establishes that beneficial interests in a properly structured Delaware Statutory Trust qualify as like-kind property under IRC §1031. irs.gov/pub/irs-drop/rr-04-86.pdf
2. SEC Office of Investor Education — Accredited Investor definition under Regulation D, Rule 501. sec.gov — Accredited Investor
3. IRS Newsroom — One Big Beautiful Bill provisions (2025). irs.gov/newsroom/one-big-beautiful-bill-provisions
4. IRC §1031, Title 26 of the United States Code — like-kind exchange general rules and timelines. law.cornell.edu/uscode/text/26/1031

Tax rates verified against 2026 rules. Exchange rules reflect OBBBA (July 2025). Values current as of May 2026 — consult a qualified tax professional before making any exchange decisions.

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