Introduction to DSTs

A Delaware Statutory Trust (DST) is a legal entity created under Delaware law that holds title to real estate. The trust is managed by a sponsor or trustee, and investors purchase fractional beneficial interests in the trust—similar to owning shares of a company, but in this case, the underlying asset is real property.

DSTs became popular for 1031 exchanges following IRS Revenue Ruling 2004-86, which confirmed that a beneficial interest in a DST qualifies as direct ownership of real property for tax purposes. This means DST interests can serve as replacement property in a 1031 exchange.

The properties held in DSTs are typically institutional-quality assets: Class A multifamily buildings, medical office complexes, industrial distribution centers, net-lease retail properties, self-storage facilities, and similar asset types.

Investors consider DSTs for a variety of reasons, often related to their personal circumstances and investment goals:

• Transition from active management: Landlords who are tired of managing tenants, toilets, and maintenance may seek a more passive ownership experience.
• Diversification: An investor who has concentrated wealth in a single property may want to spread risk across multiple assets and markets.
• Access to institutional properties: DSTs provide access to property types and deal sizes that would be difficult for an individual investor to acquire alone.
• Flexible investment amounts: DST minimum investments are often lower than acquiring a property directly, allowing investors to match their exchange proceeds precisely.
• Estate planning considerations: Some investors use DSTs as part of a broader estate planning strategy.

In a 1031 exchange, the taxpayer must identify and acquire "like-kind" replacement property within the required timeframes. Since the IRS has ruled that DST beneficial interests qualify as real property, investors can identify DST offerings as replacement property—just as they would identify a physical property.

The mechanics work as follows:

• The investor sells their relinquished property, with proceeds going to the QI.
• Within 45 days, the investor identifies one or more DST offerings (along with any other properties) in writing.
• The investor completes a subscription process with the DST sponsor, including review of offering documents and suitability requirements.
• Within 180 days, the QI transfers funds to acquire the DST interest on behalf of the investor.

One advantage of DSTs is that closings can often happen quickly since the properties are already acquired and the offering documents are prepared. This can provide flexibility when timing is tight.