What is a Delaware Statutory Trust?

A Delaware Statutory Trust (DST) is a distinct legal entity created under Delaware law that permits fractional ownership of real estate assets that may be used in a 1031 Exchange. However, to use a DST in a 1031 Exchange syndication program, it must comply with the requirements of IRS Revenue Ruling 2004-86, so that a beneficial interest in the trust is treated as an undivided fractional interest in real estate for federal income tax purposes (as opposed to a security or other prohibited interest that would not be treated as real property under Section 1031). An Exchanger can defer taxes by investing in a DST rather than in a whole property.

General Guidelines
  • Access to more investors than allowed by other legal structures (Maximum 1,999 investors) 
  • Lower minimum investment amount 
  • Simple and efficient investment process 
  • Lender only needs to make one loan because the DST is the sole borrower and owns 100% of the real estate (for non-tax purposes) 
  • Loan carve-outs apply to sponsors, not investors 
  • Lender does not underwrite each investor 
  • Sponsor makes decisions on behalf of the investors 
  • Investors cannot cause a default on the entire loan 
  • Investors do not need separate special purpose entities (SPEs) 
Why Consider a DST?
  • Potential to own institutional quality real estate 
  • Ability to diversify by property type and location 
  • Turnkey solution: Sponsor is responsible for sourcing, due diligence, structuring and financing of debt, property and program management 
  • Fast and efficient closing process to meet timing requirements 
  • Certainty of closing on acquisition of replacement property 
  • Elimination of property management responsibilities 
  • Potential for monthly income 
  • Long-term, non-recourse financing in place 
Why Invest Cash Into DSTs?

The potential benefits of a DST program are not restricted to 1031 Exchange funds. Investors may also choose to invest directly into a DST, which may provide the following potential benefits:

  • Tax-deferral strategy 
  • Rental income paid monthly 
  • Ownership in institutional-quality real estate 
  • No management responsibilities/passive ownership 
  • Build your own diversified real estate portfolio 
  • Depreciation of real estate can help to offset taxable income 
Limitations on a DST

The DST must adhere to the following prohibitions, which are commonly referred to as the Seven Deadly Sins (See IRS Revenue Ruling 2004-86):

  • Once the offering is closed, there can be no further capital contributions to the DST by either existing or new investors 
  • The DST cannot renegotiate existing loans or borrow more funds (except in the case of a tenant’s bankruptcy or insolvency) 
  • The DST cannot reinvest proceeds from the sale of its real estate 
  • The DST is limited to making minor, nonstructural capital improvements, in addition to those required by law 
  • Any reserves or cash held between distribution dates can only be invested in short-term debt obligations 
  • All cash, other than necessary reserves, must be paid out to investors 
  • The DST cannot renegotiate existing leases or enter into new leases (except in the case of a tenant’s bankruptcy or insolvency)