What is a Delaware Statutory Trust (DST)?

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:

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  • 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 size 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 Consider a DST?

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-size 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)

Need a risk run-through for your situation?

Chat with an EZ 1031 specialist, call us at [INSERT HYPERLINK TO PHONE #], chat with us [INSERRT LINK TO LIVE CHAT], or ask your CPA—we’re happy to walk you through the details before you take the next step.

This material is for informational purposes only and is not tax, legal, or investment advice. Always consult qualified professionals regarding your specific circumstances.