In the world of real estate investing, the ability to defer capital gains tax through a 1031 exchange is a powerful tool. Traditionally, many investors have used this strategy to trade one piece of real estate for another of “like-kind” to avoid triggering taxes. However, a growing number of real estate investors—particularly those seeking passive income, portfolio diversification, and estate planning benefits—are turning to Delaware Statutory Trusts (DSTs) as a qualified vehicle for completing their 1031 exchanges.

This article provides a comprehensive breakdown of how DSTs work within the framework of a 1031 exchange, the advantages and disadvantages they bring, and why they’re gaining popularity in today’s market.

What Is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust is a legal entity created under Delaware law that allows multiple investors to hold fractional ownership in institutional-quality real estate. A DST is not a REIT (Real Estate Investment Trust), nor is it a TIC (Tenancy in Common), although it shares some features with both. It’s typically used by real estate sponsors to hold assets such as apartment complexes, industrial parks, self-storage facilities, medical offices, and retail centers.

A DST qualifies as a replacement property for a 1031 exchange under IRS Revenue Ruling 2004-86, provided it meets specific criteria. Investors can use their 1031 exchange proceeds to purchase beneficial interests in the DST rather than a single replacement property.

How a DST Works in a 1031 Exchange

Sale of the Relinquished Property

The investor sells their original investment property and places the proceeds with a Qualified Intermediary (QI) to avoid constructive receipt and ensure 1031 eligibility.

Identification Period

Within 45 days, the investor must identify their replacement property or properties—DSTs qualify as a “like-kind” investment.

Acquisition of DST Interests

Instead of purchasing a direct piece of real estate, the investor buys beneficial ownership interests in a DST. The DST already holds title to the property, typically a large, stabilized asset managed by a professional sponsor.

Passive Ownership

Investors receive income distributions (usually monthly or quarterly), and the DST handles all property management, leasing, debt servicing, and accounting. The investor has no operational control.

Pros of Using a DST in a 1031 Exchange

Access to Institutional-Grade Assets

DSTs provide access to high-value real estate such as Amazon distribution centers, medical campuses, or luxury multifamily buildings—properties typically out of reach for individual investors.

Fractional Ownership and Diversification

Because DST shares are fractional, investors can divide their exchange proceeds across multiple DSTs in different sectors or regions, significantly diversifying risk.

Turnkey 1031 Compliance

DSTs are pre-structured to meet IRS requirements for like-kind replacement property. Closing is fast and often completed in days, which helps investors meet the 180-day exchange deadline.

No Active Management Required

For landlords seeking to retire from the day-to-day demands of managing tenants and toilets, DSTs offer true passive income—no midnight phone calls or maintenance hassles.

Pre-Packaged Debt (If Applicable)

DST sponsors may secure non-recourse institutional financing on the asset, which allows investors to satisfy the “equal or greater debt” requirement in a 1031 exchange without arranging financing themselves.

Estate Planning Advantages

Upon death, heirs receive a stepped-up cost basis to fair market value, potentially eliminating deferred capital gains. Additionally, DST interests can be divided among heirs without selling the underlying asset.

Cons of Using a DST in a 1031 Exchange

Illiquidity

DST interests are not publicly traded. Investors should expect to hold the investment for 5–10 years, with no secondary market. Early exits are difficult and often not possible.

No Control Over Asset Management

All decisions are made by the DST sponsor. Investors have no voting rights or say in property-level decisions, including refinancing, leasing, or when to sell.

Fees and Load Costs

DSTs can carry higher internal fees, including acquisition fees, asset management fees, and disposition fees. These may reduce investor returns compared to direct ownership.

Fixed Structure—No Refinancing or Contributions

The IRS limits what DSTs can do post-formation. The trust cannot renegotiate the loan, raise new capital, or reinvest proceeds. This limits flexibility if market conditions change.

Market and Sponsor Risk

DST performance depends on both the real estate market and the sponsor’s ability to manage the property effectively. A weak sponsor or poor market conditions can impair returns.

Why More Investors Are Turning to DSTs

Several factors are contributing to the rising popularity of DSTs among 1031 exchange investors:

Aging investor base | Many real estate investors are entering retirement and no longer want the burden of active management.
Rising property values | Higher sale proceeds require larger or multiple replacement properties; DSTs simplify this.
Tight timelines | Finding, vetting, and closing on quality replacement properties within 45 days is increasingly difficult.
Access to debt | In a high interest rate environment, DSTs offer institutional debt at terms not available to most individuals.
Portfolio rebalancing | Investors looking to exit smaller or single-family rentals can trade into diversified, stabilized assets in strong markets.

Are DSTs Right for You?

Delaware Statutory Trusts are not a one-size-fits-all solution, but they can be a powerful tool for the right investor. They offer 1031 exchange deferral, income potential, and a hands-off ownership experience in high-quality assets.

However, DSTs are best suited for investors who:

Prioritize passive income over control
Want to diversify without active property hunting
Are comfortable with long-term illiquid investments
Understand the fee structure and are working with a knowledgeable advisor

Before investing in a DST, always review the Private Placement Memorandum (PPM), understand the exit strategy, and consult with tax advisors, attorneys, and qualified 1031 professionals to ensure it aligns with your financial goals.