Tax Deferral Using a 1031 Exchange – DST
A Delaware Statutory Trust (DST) is a legal entity that holds and manages property investments. This type of trust is often used in real estate investment opportunities, where, with the coordination of a Sponsor, investors pool their resources to purchase and manage a property. The DST is a popular choice for investors who want to take advantage of the “like-kind” 1031 exchange tax benefits of a trust structure while still maintaining control of their investments.
One of the main benefits of a DST is that it allows investors to defer capital gains taxes as they buy into and later receive the proceeds on the sale of their interest in the trust. This means that the investor, upon the property’s sale, can reinvest the proceeds without having to pay taxes on the gains until a later date. This can be a significant advantage for investors looking to reinvest their money without incurring a large tax bill.
Another advantage of a DST is that it can provide limited liability protection for investors. Because the trust is a separate legal entity, investors are not personally liable for any debts or liabilities incurred by the trust. This can help protect investors from potential lawsuits or other legal issues that could arise from property management. The funding of the purchase is entirely non-recourse against the individual investors.
A trustee must be appointed to manage the trust and its assets to form a DST. The trustee is responsible for making investment decisions and managing the property on behalf of the investors. Usually, the trustee is a professional organization, the Sponsor, specializing in managing real estate investments.
Investors interested in participating in a DST must purchase interests in the trust, similar to shares of stock in a corporation. While there may be exceptions, purchasing a DST should be considered a long-term investment. The Sponsor has the sole responsibility to manage the property and time its exit the property (referred to as going full cycle).
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Frequently Asked Questions
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How long is my money locked up with a DST?
DST investments are illiquid and generally structured as long-term holds, typically ranging from 3 to 10 years depending on the sponsor’s business plan for the property. There is no public market for DST interests, and the sponsor — not the individual investor — controls the timing of the property sale (“going full cycle”). One notable carveout: some DSTs are structured with a much shorter, roughly two-year horizon specifically designed as a bridge into a subsequent UPREIT (Section 721) contribution, rather than a standalone long-term hold — investors considering one of these should understand upfront that the exit path and timeline work differently from a typical DST. Investors should be prepared to hold their interest for the full term of whichever structure applies and should not invest funds they may need access to in the near term.
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What is the minimum investment for a DST?
Minimum investments vary by sponsor and offering, but DSTs are commonly available starting in the $25,000–$100,000 range. Investors must also meet the SEC’s accredited investor standard to participate. Because minimums differ across offerings, the consulting process matches an investor’s target amount to available deals.
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How does a DST help me defer capital gains taxes?
A DST interest qualifies as “like-kind” real property under IRC Section 1031, so proceeds from the sale of an investment property can be reinvested into a DST without immediately triggering capital gains tax. The gain is deferred, not eliminated, and the transaction must follow standard 1031 exchange rules and deadlines, including using a Qualified Intermediary before the original sale closes. This makes a DST a common option for investors who want to exit direct property management while keeping their exchange intact.
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What happens when the DST sells the property?
When the sponsor sells the underlying property — referred to as the trust “going full cycle” — investors receive their share of the proceeds based on their ownership interest. At that point, an investor can choose to complete another 1031 exchange to continue deferring the gain, or cash out and recognize the deferred tax. The timing of this sale depends on the sponsor’s business plan, not individual investors.
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What are the main risks of investing in a DST?
DST interests are illiquid, non-traded, and involve the same risks as direct real estate ownership plus the risk of not controlling management or exit timing, since the sponsor makes those decisions on behalf of all investors. As with other alternative investments, there is no guarantee of income, appreciation, or return of principal, and an investor could lose all or a substantial portion of the amount invested. Prospective investors should review the offering’s private placement memorandum in full and consult their own tax and legal professionals before investing.
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Can I diversify my investment across multiple DSTs?
Yes — when an exchange is of sufficient size to meet multiple offerings’ purchase minimums, it may be appropriate to assemble a diversified portfolio strategy across more than one DST, rather than concentrating the full exchange in a single property or sponsor. Spreading an exchange across several DSTs can reduce exposure to any one property, market, or sponsor, though it does not eliminate the risks inherent to DST investments generally. Because the right approach depends on the size of the exchange, timeline, and individual circumstances, investors should consult with their financial advisor team before finalizing a portfolio strategy.
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