By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Delaware Statutory Trusts (DSTs) and 1031 Exchanges
A DST holds real estate for many passive investors. Under Rev. Rul. 2004-86 its interests can be 1031 replacement property, but they are illiquid.
Delaware Statutory Trusts (DSTs) and 1031 Exchanges
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What is a Delaware Statutory Trust?
- A DST is a trust formed under Delaware law that holds title to one or more properties, while investors own beneficial interests in the trust.
- A sponsor and trustee run the property; investors have no management rights.
- DSTs commonly hold apartments, industrial buildings, retail or medical office properties, often with mortgage debt.
- Interests are usually sold as private placements under Regulation D, generally to accredited investors.
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What is a Delaware Statutory Trust?
- A DST is a trust formed under Delaware law that holds title to one or more properties, while investors own beneficial interests in the trust.
- A sponsor and trustee run the property; investors have no management rights.
- DSTs commonly hold apartments, industrial buildings, retail or medical office properties, often with mortgage debt.
- Interests are usually sold as private placements under Regulation D, generally to accredited investors.
How can a DST fit into a 1031 exchange?
- Under Rev. Rul. 2004-86, an interest in a properly structured DST is treated as a direct interest in real estate for Section 1031.
- Since 2018, Section 1031 applies only to real property held for business or investment use.
- Replacement property must be identified within 45 days and acquired within 180 days, and a qualified intermediary holds the sale proceeds.
- A DST can be one of several replacement properties, and multiple DSTs can be combined to match the value and debt being replaced.
Restrictions that come with the DST structure
- To keep its tax treatment, the trustee generally can't accept new capital, take on new loans, reinvest sale proceeds or enter new leases.
- Capital spending is limited to normal repairs and maintenance, and cash beyond reserves must be distributed.
- These limits make a DST rigid if a property needs major capital or loses a key tenant.
- Many DST agreements allow conversion to an LLC to address problems, which can change the tax treatment of a later exchange.
How does a DST differ from tenancy-in-common (TIC)?
- TIC owners hold deeded fractional interests; IRS Rev. Proc. 2002-22 sets conditions for TIC ruling requests, including a 35-owner limit.
- TIC owners must unanimously approve sales, leases and financing, which can stall decisions.
- DST investors have no vote, which avoids unanimity problems but leaves every decision with the sponsor.
Tax treatment for DST investors
- Most DSTs are grantor trusts, so investors report their share of income, expenses and depreciation on their own returns.
- Depreciation can offset part of the income, and is recaptured when the property is sold.
- When the DST sells, investors can do another 1031 exchange or recognize the deferred gain; under current law, heirs generally receive a stepped-up basis.
- California requires annual Form FTB 3840 filings when California property is exchanged into property outside the state.
Risks and costs
- Interests are illiquid, with no active secondary market, and the sponsor decides when the property is sold.
- Upfront commissions, offering costs and financing fees reduce the amount actually invested, and ongoing fees apply.
- Returns depend on one or a few properties and tenants, and mortgage debt magnifies losses.
- Sponsor quality and financial strength matter, and tight exchange deadlines can compress due diligence.
Key takeaways
- A DST offers passive, fractional real estate ownership that can qualify for a 1031 exchange.
- Rev. Rul. 2004-86 restrictions make DSTs rigid and investors passive.
- Illiquidity, layered fees and concentration are the main trade-offs.
- Coordinate exchange timing and structure with a qualified intermediary, CPA and attorney.
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Sources
- IRS Rev. Rul. 2004-86 — Delaware statutory trusts and Section 1031
- IRS Rev. Proc. 2002-22 — Tenancy-in-common interests
- 26 U.S.C. § 1031 — Exchange of real property held for productive use or investment
- 17 CFR § 230.501 — Regulation D definitions (accredited investor)
- California FTB — Reporting like-kind exchanges