Understanding Delaware Statutory Trusts: A 1031 Exchange Alternative

When investors decide to sell an income-producing property, they often look for ways to defer capital gains taxes through a Section 1031 exchange. While many choose to reinvest directly into another property, some investors prefer a more passive approach that still qualifies for 1031 treatment. One potential option for those investors is the Delaware Statutory Trust (DST).

What Is a Delaware Statutory Trust?

A Delaware Statutory Trust is a legally recognized trust structure that allows multiple investors to hold fractional ownership interests in large, institutional-quality real estate assets. The trust itself holds title to one or more properties, and investors (known as beneficial owners) share in the income, appreciation, and potential tax benefits proportionate to their ownership.

DSTs are typically sponsored and managed by professional real estate firms, giving individual investors access to larger assets—such as multifamily properties, industrial buildings, or medical facilities—that would otherwise be out of reach for a single buyer.

How DSTs Work in a 1031 Exchange

Under IRS Revenue Ruling 2004-86, a properly structured DST is considered a “like-kind” replacement property for 1031 exchange purposes. This means that investors selling an investment property can reinvest proceeds into a DST to defer capital gains taxes, provided they meet the standard exchange rules and timelines.

The general process is similar to any 1031 exchange:

1. The investor sells their relinquished property.

2. A qualified intermediary holds the proceeds.

3. The investor identifies potential replacement properties within 45 days.

4. Funds are reinvested into the chosen DST within 180 days to complete the exchange.

Potential Advantages of DSTs

DSTs can offer several appealing features to investors who no longer want to manage tenants or properties directly:

• Passive ownership: The sponsor handles all day-to-day management, leasing, and maintenance.

• Access to institutional real estate: Investors can participate in professionally managed portfolios of high-quality properties.

• Diversification: Many DSTs allow for investment across different property types and geographic regions.

• Income potential: DSTs are designed to distribute a share of the rental income to investors, though distributions are not guaranteed.

Considerations and Risks

DST investments are not suitable for all investors. They are generally offered through private placements under Regulation D and are limited to accredited investors. Key risks include:

• Illiquidity: Interests in DSTs are not publicly traded and can be difficult to sell.

• Market and tenant risks: Property values and income can fluctuate with market conditions.

• Lack of control: Investors have no direct say in management decisions.

• Fees and expenses: DSTs often include upfront costs and ongoing management fees.

As with any investment, individuals should consult their financial, tax, and legal professionals before deciding whether a DST is appropriate for their personal situation.

The Bottom Line

For investors completing a 1031 exchange who want to transition from active property management to passive income potential, Delaware Statutory Trusts can be a viable alternative. They offer an opportunity to maintain tax deferral benefits while shifting to a more hands-off investment approach—but they also come with unique risks and requirements that should be carefully reviewed.

This is for informational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities.

Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.  

This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years)

There are material risks associated with investing in private placements, Delaware Statutory Trusts ("DSTs") and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section.

Risks associated with 1031 exchange- A 1031 exchange has an identification period of 45 days from the sale of the relinquished property to identify a potential replacement property or properties depending on the value of the previous property. To defer all capital gains tax, you must reinvest the entire net proceeds from the sale of the relinquished property into the replacement property and acquire debt on the new property that is equal to or greater than the debt on the property that was just sold and relinquished.

Securities offered through Concorde Investment Services, LLC (CIS) Member FINRA/SIPC.  Legacy 1031 is independent of CIS, both of which are unaffiliated with Raven Commercial Group.