A is a separate legal entity formed under the Delaware Statutory Trust Act of 1988. For 1031 exchange purposes, a DST allows multiple to hold a fractional, beneficial interest in real estate that the IRS treats as direct ownership of property under , provided the trust meets the conditions in Revenue Ruling 2004-86.

Why DSTs exist

The 45-day identification window in a 1031 exchange is brutal. Many investors sell appreciated property without a qualified replacement lined up, then scramble to identify three candidates inside the window. DSTs solve this in two ways: they give investors pre-vetted replacement property they can identify confidently, and the minimum investment is small enough (often $25,000 to $100,000) to fit even partial 1031 proceeds.

The Rev. Rul. 2004-86 conditions

The IRS gave DSTs 1031-eligible status conditioned on what practitioners call the seven prohibitions:

  1. No new contributions to the DST after the offering closes.
  2. No renegotiation of the trust's terms.
  3. No renegotiation of existing leases or new leases (except in limited circumstances).
  4. No reinvestment of sale proceeds.
  5. Limited capital expenditure capability.
  6. Cash held by the trust must be invested in short-term debt only.
  7. Distributions of cash held by the trust are required.

Each prohibition exists to keep the DST a passive, non-business entity for tax purposes.

FIGURE 2 · How a Delaware Statutory Trust holds property
INVESTOR01INVESTOR02INVESTOR03INVESTOR04INVESTOR05INVESTOR06ACCREDITED BENEFICIAL OWNERSDelaware Statutory TrustSingle legal entity. Holds title. Distributes pro-rata.Treated as direct ownership for IRC § 1031 purposes.SPONSORmanagesReal Property(multifamily, industrial, NNN, healthcare, self-storage, etc.)

Source · Rev. Rul. 2004-86

Who uses DSTs

Typical DST investors are real estate owners (landlords, retiring sponsors, family-trust trustees) who want to defer capital gains via 1031 without continuing to operate property. DSTs are restricted to under SEC Rule 501(a) and offered only via through registered broker-dealers.

What you trade

You trade operational control for diversification and convenience. The DST sponsor manages the asset; you receive distributions, depreciation pass-through, and (eventually) sale proceeds. You cannot influence leasing, financing, or sale timing. You cannot exit easily. There is no public secondary market. You should plan to hold for the full 5 to 10 year period.

What's next

DSTs are not for every 1031 investor. If you need control, hands-on involvement, or short-term liquidity, direct fee-simple replacement property may be a better fit. If you have $200k to $5M of relinquished proceeds, want diversification across multiple properties, and do not want to be a landlord, DSTs are likely worth a conversation with your broker-dealer.

This article is for educational purposes only and does not constitute investment, tax, or legal advice. Consult your own tax, legal, and financial advisors.