This article was posted on Monday, Nov 01, 2021

Austin Bowlin discuses 1031 ExchangesIf you own highly appreciated investment property and have considered performing a 1031 Exchange, then you have likely heard about Delaware Statutory Trust (DST) replacement property – you may even have friends that have invested in DSTs.

DSTs have been around since 2004; however, they have become increasingly popular with landlords ready to retire from active property management. 

DSTs offer significant tax benefits and can provide greater income and appreciation potential with competitive risk-adjusted returns. However, DST investment property is not for everyone – like with any real estate investment, they do come with a certain level of risk. Therefore, before investing in DST real estate, it is essential to understand how DSTs work and clearly understand the risks with DST investing. 

What is a Delaware Statutory Trust?

A Delaware Statutory Trust is a real estate ownership structure where multiple investors hold an undivided fractional interest in the investment real estate held in a trust. The trust is established by a professional real estate company, referred to as the “DST Sponsor,” who identifies and acquires the real estate assets to be held in the trust. As exchangers invest, their funds displace the capital used by the DST sponsor to purchase the property until it is eventually wholly owned by the investors. Investors own a beneficial interest in the trust. This means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate.

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Benefits of DST Investment Property 

Delaware Statutory Trusts offer many advantages, including tax benefits, income potential, the opportunity to buy ownership in an institutional-quality asset, and perhaps most notably, DSTs are eligible for 1031 Exchanges. Below are the key benefits of DST real estate.

  • Tax Savings: As an approved 1031 Exchange ownership structure, DSTs allow for the deferral of both federal and state capital gains tax, net investment income tax, and depreciation recapture tax. 
  • Maximize Potential for Cash Flow: DSTs are structured with an emphasis on cash flow and typically include high-quality institutional property.
  • Eliminate Active Property Management: DST properties are managed by large real estate firms referred to as DST Sponsors.  
  • Fractional Ownership Structure: Allows investors to own a “fractional interest” in a large property or portfolio of multiple properties. 
  • Institutional-Grade Real Estate: DSTs provide individual investors access to higher-grade institutional real estate, typically held by pensions, REITS, and large institutional investors.
  • Eliminate Tax for Beneficiaries: DSTs allow for a “step-up in basis” upon the passing of an owner (no capital gains, depreciation recapture, etc.) 
  • Reduce Risk Through Diversification: Investors have access to different property types and in different markets.
  • Low-Cost Non-Recourse Debt Matching: Because many investors have debt that must be matched in their 1031 Exchange, Delaware Statutory Trusts are often structured with debt in place.
  • Increase Annual Depreciation to Offset Taxable Income: Another tax benefit of owning DST real estate is the potential to increase annual depreciation to offset taxable income for the investor.
  • Low Investment Minimums: DSTs typically have a low minimum investment of around $100K, allowing investors to acquire multiple DSTs.
  • Closes in 3-5 Days: DSTs can close in a matter of days, making them an excellent option for investors approaching their 45-Day identification deadline.


Risk Factors to Consider

Ownership of a DST is still very much ownership of investment real estate. Due to the structure of Delaware Statutory Trusts as a passive ownership entity, a beneficial ownership interest in a DST presents unique risks that investors should be aware of and consider. The following risks should be fully understood and carefully considered when assessing suitability for ownership of a Delaware Statutory Trust:


  • Lack of Liquidity and Timing of Exit: Generally, DSTs have a target property hold period ranging from 3 – 10 years. The hold period may differ significantly from the targeted timeline based on market conditions. The investment should be viewed as illiquid while invested in the property. Early exit by the investor, for liquidity purposes, may not be possible or may only be possible at a significant discount to the trust’s net asset value.
  • Lack of Control: Owners of a beneficial interest in Delaware Statutory Trust have little control over management decisions and eventual sale of the underlying property. The real estate investment company managing the trust is responsible for all operating decisions.
  • Failure of Due Diligence and Non-Compliance: All DSTs offered through Real Estate Transition Solutions undergo a rigorous due diligence process. Each real estate investment company’s management is thoroughly reviewed before the DST offering is made available to our clients. However, failure to identify an issue may result in mismanagement or non-compliance in adhering to the IRS criteria established for a DST to qualify for tax-deferred exchange treatment.
  • Loan Modifications May Not Be Possible: Due to the structure of a DST, restructuring the financing of the property may not be possible without changing the legal ownership structure. DSTs mitigate this issue by utilizing master lease agreements between the trust and the real estate investment company.
  • Projected Cash Flow May Not Be Consistent with Actual Performance: As with any real estate property investment, cash flow is subject to market, economic, tenant, and location risk. As a result, projected cash flows are typically conservative in nature but cannot be guaranteed.
  • Projected Appreciation May Not Occur: As with any real estate property investment, asset appreciation is subject to market, economic, tenant, and location risk. Accordingly, appreciation may not occur at the end of the trust’s property holding period, or the holding period may be extended beyond stated projections.
  • Interest Rate Risk: The value of real estate is impacted by the current interest rate environment. Changes in interest rates may increase uncertainty surrounding financing and appreciation.
  • Regulatory Risk: DSTs are susceptible to changes in the IRS’s treatment of tax-deferred exchanges. Furthermore, the advantages of ownership of a beneficial interest in a DST for estate planning purposes may be eliminated based on changes in the Internal Revenue Code.
  • DST Management Costs and Fees: DST structure provides for management fees to the sponsoring real estate investment company. While clearly disclosed upfront, these fees could reduce cash flow levels below that of the stated projections.
  • Available Only to Accredited Investors: Because of the potential risks and specifically the lack of liquidity associated with DST ownership, DSTs are only available to accredited investors, meaning individuals with a net worth in excess of $1 million not including the value of their primary residence.

The Bottom Line

Delaware Statutory Trusts provide unique and customizable options to help meet investment property owners’ objectives. However, before investing in a DST property, you should first consult a licensed 1031 Exchange Advisor to help determine suitability and recommend options to best meet your objectives.

If you are considering a DST replacement property for your 1031 Exchange, contact Real Estate Transition Solutions and speak to one of our licensed 1031 Exchange Advisors. Call us at 888-286-5395 or visit  Additionally you can watch a presentation on the AOA Live stream at (27) How to Plan for a Successful 1031 Exchange – YouTube (or have them search AOAUSA and How to Plan for a Successful 1031 Exchange).

Austin Bowlin, CPA – Chief Exchange Strategist & Partner at Real Estate Transition Solutions

As Chief Exchange Strategist, Austin leads the firm’s team of licensed 1031 Exchange advisors & analysts and provides consultation on tax liability, deferral strategies, legal entity structuring, co-ownership arrangements, 1031 replacement property options, and Delaware Statutory Trust investments.

Real Estate Transition Solutions is a consulting firm specializing in tax-deferred 1031 Exchange strategies and Delaware Statutory Trust investments. For over 26 years, we have helped investment property owners perform strategic 1031 Exchanges by developing and implementing well-planned, tax-efficient transition plans carefully designed to meet their objectives. Our team of licensed 1031 Exchange Advisors will guide you through the entire Exchange process and help you select 1031 replacement properties best suited to meet your goals. To learn more about Real Estate Transition Solutions, call 888-286-5395 or visit our website at

The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsor’s Private Placement Memorandum (PPM), which is solely available to accredited investors and accredited entities. Case studies and examples are for illustrative purposes and not representative of future results. There are risks associated with investing in real estate properties, including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, and illiquidity. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular 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 situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Securities offered through Aurora Securities, Inc. (ASI), member FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a registered investment advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.

Read more articles from the November 2021 Issue of the AOA Magazine.