What is a Delaware Statutory Trust?
A Delaware Statutory Trust (DST) is a legal entity used to hold title to investment real estate that allows multiple investors to own fractional interests in institutional-quality properties. For real estate investors, DSTs are most commonly used as replacement properties in 1031 exchanges, providing a passive, hands-off alternative to directly purchasing and managing replacement property.
The IRS confirmed in Revenue Ruling 2004-86 that beneficial interests in a DST qualify as like-kind property for 1031 exchange purposes. This means an investor selling a rental property can exchange into DST interests and defer capital gains taxes while transitioning from active management to completely passive ownership.
How DSTs work
A DST sponsor (a real estate company) acquires a property — typically a large multifamily, industrial, medical office, or retail asset — and places it in a Delaware Statutory Trust. The sponsor then offers fractional beneficial interests in the trust to investors, with minimum investments typically starting at $100,000. The trust holds and manages the property, collects rent, and distributes income to beneficial interest holders.
Investors in a DST are purely passive. The trust agreement governs all decisions regarding the property — leasing, management, capital expenditures, and eventual sale. Investors have no vote on management decisions and cannot direct the trustee's actions. This "no active management" requirement is what makes DSTs qualify as like-kind property under IRS rules; the investor's interest is treated as a direct interest in real property rather than a partnership interest.
Typical DST investments
| Property type | Typical size | Projected yield |
|---|---|---|
| Multifamily apartments | 200-500 units, $40-$100M | 4-6% cash yield |
| Industrial/logistics | 200K-1M SF, $30-$80M | 4-5.5% cash yield |
| Medical office | 50K-200K SF, $15-$50M | 5-6.5% cash yield |
| Net lease retail | Single-tenant, $10-$40M | 4.5-6% cash yield |
Why investors use DSTs
1031 exchange solution: Investors selling property who don't want to buy and manage a replacement property can exchange into DST interests. This is especially popular with retiring landlords who want to stop managing property but don't want to pay capital gains taxes on the sale.
Passive income: DST investors receive monthly or quarterly distributions without any management responsibilities. No tenant calls, no maintenance decisions, no vacancy management. The sponsor handles everything.
Institutional quality: DSTs typically hold larger, higher-quality properties than most individual investors can access directly. A solo investor might own a duplex; a DST might hold a 300-unit Class A apartment complex.
Fractional investment: DSTs allow you to invest the exact amount of your 1031 exchange proceeds. If your exchange requires reinvesting $250,000, you can purchase $250,000 in DST interests rather than finding a single property at exactly that price point.
Limitations and risks
DST investors have no control over the property or its management. If the sponsor makes poor decisions, investors have no recourse other than legal action. DST interests are illiquid — there's no public market to sell your interest, and the typical hold period is 5-10 years. The sponsor's fees (acquisition fees, management fees, disposition fees) reduce investor returns. And the underlying real estate carries all the normal risks: vacancy, market downturns, capital needs, and natural disasters.