1031 into a DST: Delaware statutory trust pros and cons

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: A Delaware statutory trust (DST) lets you exchange into a fractional interest in large, professionally managed property, and Rev. Rul. 2004-86 treats a properly structured DST interest as real property for 1031. The trade-offs: layered fees, no control, multi-year illiquidity and usually an accredited-investor requirement.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

At some point every landlord gets a phone call at 11 p.m. about a toilet and thinks: what if I owned real estate, but didn't own any toilets? The Delaware statutory trust is the tax code's answer for exchangers. You trade your rental for a slice of an apartment complex, warehouse or medical building that someone else manages. You keep the 1031 deferral. You lose the steering wheel.

This guide is educational, not a recommendation of any offering. Start with 1031 basics if needed.

CPA Warning Label: A DST solves a 1031 deadline problem by handing your money to a sponsor for years. Fees and illiquidity are the price of never fixing a toilet again.

What a DST is

A DST is a trust formed under Delaware law that holds title to real property. Investors buy beneficial interests. Rev. Rul. 2004-86 concluded that a DST structured as in the ruling is an investment trust, classified as a grantor trust, so each investor is treated as owning an undivided fractional interest in the underlying real estate. That makes a DST interest eligible replacement (and relinquished) property for a 1031 exchange.

The ruling works only if the trustee's powers are tightly limited. Practitioners call these limits the "seven deadly sins." Based on the ruling, the trustee can't:

1. Accept future contributions to the trust from current or new beneficiaries once the offering closes.
2. Renegotiate the terms of existing loans or borrow new money (except in tenant bankruptcy or insolvency).
3. Reinvest sale proceeds in new property.
4. Make more than minor non-structural modifications to the property, except as required by law.
5. Renegotiate leases or enter new leases (except on tenant bankruptcy or insolvency).
6. Invest cash other than in short-term debt obligations, distributing cash to beneficiaries on a current basis.
7. Hold reserves beyond what is needed for normal repairs and expenses.

To work around the lease limit, most DSTs master-lease the property to an affiliate of the sponsor, which manages and subleases to tenants. If the property needs a major change, many DSTs have a "springing LLC" provision that converts the DST into an LLC, which can end 1031 eligibility for later exchanges.

Why exchangers use them

• Fill an identification gap. DST interests are often available in odd amounts and can close quickly, helping meet day 45 and day 180 deadlines or use leftover cash that would otherwise be boot. See 1031 identification rules.
• Replace debt. DSTs usually carry non-recourse debt already in place, and your share of it counts toward replacing the debt on your relinquished property.
• Retirement from active landlording. No tenants, no repairs, no 11 p.m. toilets. For a FIRE household that wants real estate exposure without the second job, that's the pitch.
• Diversification. One property can be split across several DSTs by sector and region.
• Estate planning. Interests can be divided among heirs, who generally get a basis step-up at death under current law.

Fees and illiquidity

The trade-off for passivity is cost and lock-up. Typical DST offerings include several layers of fees disclosed in a private placement memorandum (PPM): selling commissions to brokers, dealer-manager fees, offering and organizational costs, a sponsor acquisition fee, and the spread between the sponsor's purchase price and the price to investors, plus ongoing asset management and property management fees. Combined upfront load often eats a meaningful share of your equity on day one. Read the PPM's "estimated use of proceeds" table; it tells you how much of your dollar goes into the building.

• Illiquidity: DSTs typically hold for several years, with no public market. You can't sell early except at a discount, if at all.
• No control: the sponsor decides when to sell. If it sells in a bad year, you either do another exchange (usually into another DST or property) or pay tax.
• Debt and distributions: leverage can be significant, and the trustee can't refinance under the deadly-sins rules. Distributions aren't guaranteed.
• Depreciation still flows through, but it's the sponsor's schedule, and recapture still follows you.

Accredited investor rules

Most DSTs are sold as private placements under Regulation D, generally limited to accredited investors. The SEC's definition for individuals includes:

• Income over $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the past two years, with an expectation of the same this year; or
• Net worth over $1 million, alone or with a spouse or spousal equivalent, excluding the value of your primary residence; or
• Holding certain professional certifications in good standing (Series 7, 65 or 82).

Many retiring landlords qualify on net worth. Being accredited doesn't mean the investment is suitable; it means the securities laws assume you can evaluate it. The broker selling it has to perform a suitability or best-interest analysis, and you should ask how they are compensated.

Questions to ask

• What share of my investment goes into the property after all upfront fees and loads?
• What is the loan-to-value, interest rate, maturity date, and is the debt non-recourse? What happens if the loan matures before the sponsor sells?
• What is the expected hold period and exit plan? What happened in the sponsor's previous programs, including any that lost money?
• Is there a master lease? What does the master tenant earn?
• Is there a springing LLC provision, and would its conversion end my ability to do another 1031?
• What are the reserve levels, and what happens if they run out (the trustee can't raise new capital)?
• How does my state tax the income, and will I file returns in the property's state?

DST vs other replacement options

A triple-net leased property you own yourself can give similar passivity at lower fees for larger exchanges, with concentration risk in one tenant. A REIT is liquid, but buying it means paying tax first.

How DST income is taxed

Because the trust is a grantor trust, you report your share of rents, expenses, interest and depreciation on Schedule E as if you owned the property directly. The sponsor provides an annual statement (not a K-1, since it isn't a partnership). Income is generally passive. If the property is in another state, you may owe that state's income tax and need to file a nonresident return. When the DST sells, your share of gain, including depreciation recapture, is yours, unless you exchange again.

Illustration

Illustration (made-up numbers): Frugal Fran, 58, sells a rental for $1,000,000 with a $300,000 loan and $500,000 of deferred gain. Ignoring closing costs, she has $700,000 of equity at the QI. She buys a $930,000 duplex with a $300,000 loan, using $630,000 of equity and leaving $70,000 of cash at the QI. Rather than take it as taxable boot, she identifies a DST and invests $70,000 of equity in it; the DST's 50% leverage means her share of its debt is about $70,000, which more than covers any shortfall. Full deferral.

Her neighbor Lavish Larry sells everything for $3,000,000 and puts it all into DSTs. If the combined upfront load were 8% (an assumption for illustration; check each PPM), about $240,000 of equity is fees on day one. Deferring, say, $600,000 of tax may still justify that, but Larry is now locked in for years, can't control the sale and bears tenant and debt risk. Compare to paying the tax and buying an index fund, which some readers may find gloriously boring. The 1031 vs sell calculator helps frame it.