What Is a DST 1031 Exchange?

A DST, or Delaware Statutory Trust, is a legal structure that allows multiple investors to hold fractional ownership in large, institutional-quality real estate assets. When used as the replacement property in a 1031 exchange, a DST lets investors defer capital gains taxes while moving into a passive investment that requires no property management.

How a DST Works

A sponsor company acquires a property (or portfolio of properties), places it into a Delaware Statutory Trust, and then sells beneficial interests to individual investors. Each investor owns a fractional share of the trust, which in turn owns the real estate. The sponsor handles all management, leasing, and operations. Investors receive their proportional share of the rental income, typically distributed monthly.

Why Investors Pair DSTs With 1031 Exchanges

The IRS ruled in 2004 (Revenue Ruling 2004-86) that DST interests qualify as like-kind property for 1031 exchange purposes. This opened the door for investors who want to exit active property management while still deferring their capital gains. A landlord who is tired of tenant calls, maintenance issues, and property management can sell their rental, complete a 1031 exchange into a DST, and receive passive income without any of the day-to-day responsibilities.

Typical DST Property Types

DST offerings tend to involve larger, institutional-grade properties that individual investors could not typically access on their own. Common property types include Class A multifamily apartment complexes, medical office buildings, industrial warehouses, net-leased retail (pharmacies, grocery stores), and senior living facilities. Many of these properties have long-term leases with creditworthy tenants.

Key Considerations

DSTs are securities and are sold through broker-dealers. Minimum investments typically start around $100,000. The investments are illiquid, meaning you generally cannot sell your interest on demand. Hold periods are usually five to ten years. DST investors have no control over property management decisions and cannot make additional capital contributions to the trust. These constraints are by design (they are what make the structure qualify as a 1031 replacement), but they are important to understand before committing.

Who Should Consider a DST

DSTs tend to be most appropriate for investors who are at or near retirement and want to move from active to passive real estate ownership, investors facing a 1031 exchange deadline who need a qualifying replacement property quickly, and high-net-worth individuals looking to diversify their real estate holdings across multiple markets and property types. Because DSTs are securities, investors must meet accredited investor requirements in most cases.

Before investing in a DST, work with a qualified tax advisor and a financial professional who specializes in these structures. The tax deferral benefits can be significant, but the investment characteristics need to match your time horizon, income needs, and risk tolerance.