DST 1031 Exchange: Complete Guide to Delaware Statutory Trusts
Providing Better 1031 I DST I 721 UPREIT Solutions I $550M Co-invest
Over the past decade working in real estate and finance, I've watched countless investors wrestle with the same challenge: how to defer capital gains taxes while stepping away from the exhausting demands of active property management. Through my work at Bonaventure, I've seen Delaware Statutory Trusts (DSTs) provide a meaningful solution for many of these investors.
As Chief Growth Officer at Bonaventure, I've helped facilitate numerous tax-deferred exchanges where DSTs played a central role. With our 25-year track record and over $550M co-invested alongside clients, I've learned that DSTs—like any investment strategy—come with both compelling advantages and serious risks that every investor needs to understand before committing capital.
What is a Delaware Statutory Trust (DST)?
A DST is a legal entity formed under Delaware law that allows passive, fractional ownership in real estate while qualifying as "like-kind" replacement property under Section 1031 of the Internal Revenue Code. When you invest in a DST, you're purchasing a fractional beneficial interest in professionally managed, institutional-grade real estate.
- Class A multifamily properties
- Medical office buildings
- Industrial distribution centers
- Net-leased retail properties
Modern multifamily properties represent a common DST investment type, offering institutional-grade real estate access.
The Major Advantages of DST Investments
Complete Elimination of Active Management
After years of managing properties myself and watching others do the same, I can tell you that one of the most appealing benefits is getting away from operational headaches. Many investors I work with have spent decades dealing with tenant calls, maintenance emergencies, and lease negotiations. They're ready for passive income.
With a DST, professional asset managers handle everything operational. You receive regular distributions without touching a single maintenance issue, vacancy concern, or lease negotiation. This particularly resonates with investors approaching retirement who want to preserve wealth without the ongoing burden of property management.
Access to Institutional-Grade Properties
DSTs typically invest in high-quality institutional properties, which may offer greater income stability and appreciation potential. With purchase prices typically ranging from $30 million to $100 million, these assets would be completely unattainable for individual investors. The fractional ownership structure of a DST makes them accessible.
Institutional-grade properties often feature premium amenities and professional management.
You can typically participate in these institutional-quality real estate investments with minimum investments ranging from $25,000 to $100,000, making previously inaccessible asset classes available to a broader investor base.
Non-Recourse Debt Protection
DST financing typically utilizes non-recourse debt, meaning you're not personally liable for loans associated with the properties. This structure limits your financial responsibility to your initial investment, providing an additional layer of protection—particularly important if you're focused on wealth preservation.
Historical Performance and Market Growth
According to Mountain Dell Consulting DST market data, DSTs raised nearly $5.66 billion as of December 31, 2024, representing a 10.2% increase from the previous month and a 12% increase compared to 2023. Industry sources indicate that DSTs have historically offered cash-on-cash returns ranging from 5-9% annually, though actual returns vary by sponsor and property performance.
Past performance doesn't guarantee future results, and actual returns depend on numerous factors including property performance, market conditions, and sponsor execution.
Portfolio Diversification Opportunities
Lower minimum investments allow you to allocate 1031 exchange proceeds across multiple DSTs, enabling diversification by:
- Geographic location
- Property type
- Tenant credit quality
- Lease term length
The Significant Disadvantages to Consider
No Control Over Management Decisions
While eliminating management responsibilities benefits many investors, it also means you have zero input on major decisions. You can't influence timing of property sales, management approaches, or capital improvement decisions.
In 2004, the IRS issued Revenue Ruling 2004-86, establishing that beneficial interests in a DST would qualify as replacement property for 1031 exchanges—subject to seven key restrictions that significantly limit trustee flexibility:
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No Future Contributions: Once the initial offering closes, no additional contributions can be made by current or new investors.
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Loan Restrictions: The trustee cannot borrow new funds or renegotiate existing loan terms.
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No Reinvestment of Sale Proceeds: When a DST sells a property, proceeds must be distributed to investors, who can then pursue subsequent 1031 exchanges if desired.
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Mandatory Distributions: All cash, except necessary reserves, must be distributed regularly (typically quarterly).
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Limited Capital Expenditures: Trustees can only make expenditures for normal repairs, minor non-structural improvements, or those required by law. Major property improvements are prohibited.
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Cash Reserve Investment Limitations: Reserves held between distributions can only be invested in short-term debt obligations.
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Lease Restrictions: Trustees cannot enter into new leases or renegotiate existing leases except in cases of tenant bankruptcy or insolvency. DSTs address this through master lease arrangements with affiliated entities.
Illiquidity Concerns
Secondary markets for DST interests remain limited. You need to understand that DSTs are illiquid investments with typical planned hold periods of 5-10 years. There's no guarantee that investors needing to exit early will find buyers at acceptable prices.
No Guarantees on Income or Appreciation
Distributions from DST investments aren't guaranteed and depend on underlying property performance and tenant economic health. As with all real estate investments, actual distributions may be lower than initially projected.
Real Estate Market Risks
DST investments involve risks common to all real estate investments, including potential lack of return and loss of principal. As long-term, income-focused investments, DST performance depends largely on tenant ability to pay rent. Notable risks include:
- Lack of liquidity
- Interest rate risk
- Changing market conditions
- Tenant credit deterioration
- Local market economic changes
Fees and Costs
DST investments typically include various fees that can impact net returns:
- Acquisition fees
- Asset management fees
- Property management fees
- Disposition fees upon sale
According to industry sources, the total upfront cost of a DST investment can range from 10% to 18% of invested equity. Common DST acquisition fees may range between 2% to 4.5% of the investment. This is approximately 1% to 2% of the total offering amount depending upon the amount of mortgage financing utilized within the DST. You should carefully review all fee structures outlined in the Private Placement Memorandum.
Who Should Consider DST Investments?
Based on my experience working with numerous investors over the years, DSTs may be appropriate for:
Property Owners Ready to Exit Active Management
If you're seeking to defer capital gains taxes while transitioning away from direct property management responsibilities, DSTs may be attractive.
Estate Planning Focused Families
Upon your death, DST interests can typically be transferred to heirs more easily than physical real estate, particularly when heirs have different geographic locations or varying opinions on property management. Heirs may receive a step-up in basis to fair market value at time of death, which can be advantageous for future tax planning.
Income-Conscious Investors
Those seeking regular cash flow backed by institutional-quality real estate often find DSTs appealing, though all investors should understand that distributions aren't guaranteed.
Well-designed multifamily properties provide the stable income streams that attract DST investors.
The 1031 Exchange Timeline Consideration
The timelines for 1031 exchanges are strict: you have 45 days from the sale of relinquished property to formally identify potential replacement properties and 180 days to complete the purchase. DSTs can provide value when timelines are compressed, as they typically close within 3 to 5 business days following the sale of the relinquished property—a significant advantage compared to direct property acquisitions.
Evaluating Suitability
DSTs may be most appropriate when you:
- Seek passive real estate exposure
- Are comfortable with illiquidity over 5-10 year periods
- Prioritize stable income over aggressive growth
- Want to diversify across multiple properties
- Are seeking to simplify real estate portfolio management
The key is working with experienced professionals who can help evaluate whether DSTs align with your specific investment goals, risk tolerance, and overall financial planning objectives.
Important Considerations for Prospective Investors
DSTs have provided passive income opportunities for many investors while preserving tax-deferral benefits associated with real estate ownership. At Bonaventure, I work with investors considering DST investments as part of their broader wealth management strategies.
If you're evaluating a DST investment, it's essential to:
- Thoroughly review the Private Placement Memorandum
- Understand all associated risks
- Consult with qualified tax and legal advisors
- Consider how DST investments fit within your overall portfolio
- Plan ahead, as the 45-day identification window requires timely decision-making
Important Disclosure: DST investments involve significant risks and aren't suitable for all investors. They're typically available only to accredited investors. Past performance doesn't guarantee future results. All investors should conduct thorough due diligence and consult with qualified professional advisors before making investment decisions.
Frequently Asked Questions
Are DSTs appropriate investments?
DST suitability depends on your individual circumstances, goals, and risk tolerance. They may be appropriate if you're seeking passive real estate income and understand and accept the illiquidity and risks involved. Consultation with qualified financial, tax, and legal advisors is essential before investing.
What types of properties do DSTs invest in?
Property types may include multifamily apartment communities, office buildings, industrial properties, multi-tenant retail, student housing, assisted living, self-storage facilities, medical office, single tenant retail properties and others. Properties are typically leased to creditworthy tenants on long-term leases, though specific investments vary by sponsor and offering.
How do DST distributions work?
Under the DST structure, income generated from underlying real estate is distributed to beneficial owners based on their proportionate ownership. If profits result from property sale, beneficial owners share in those profits proportionately. However, distributions aren't guaranteed and fluctuate based on property performance and tenant rent payments.
Can I sell my DST investment early?
DST investments are illiquid and designed for the full investment period. While limited secondary markets exist, there's no guarantee you'll find buyers at acceptable prices. Early exit shouldn't be expected.
What happens when a DST property is sold?
When the DST sponsor sells the underlying property, you receive your proportionate share of proceeds. You can then pursue another 1031 exchange into a new DST or other qualifying property, or take cash and pay applicable taxes on gains.
Who can invest in DSTs?
DSTs are typically limited to accredited investors, which the SEC generally defines as individuals with net worth (excluding primary residence) of $1 million or more, or average annual income exceeding $200,000 for individuals or $300,000 for couples filing jointly over the past two years. Minimum investments typically range from $25,000 to $100,000, varying by offering.
Connect With Me and the Bonaventure Team
At Bonaventure, I work with real estate investors evaluating various strategies for tax-deferred exchanges and portfolio management. If you're considering whether DST investments align with your financial goals and circumstances, I invite you to schedule a consultation with our team.
I understand that every investor's situation is unique. My approach focuses on understanding your objectives, timeline, and risk tolerance to help you make informed decisions about your real estate investment strategy.
Contact us to discuss how we can support you in evaluating DST investments and other wealth management strategies tailored to your specific needs. You can also connect with me directly on LinkedIn to continue the conversation.
Mike Bonaventure is Chief Growth Officer at Bonaventure, a 25-year vertically integrated operator with over $550M co-invested alongside clients. The firm has achieved a 20.5% IRR across 31 completed deals and manages $2.7B in assets while serving over 500 families with tax-efficient wealth building strategies.
This article is for informational purposes only and does not constitute tax or legal advice. Every investor's situation is different. Before making any decisions about 1031 exchanges, consult with your CPA, tax advisor, or attorney to understand how these rules apply to your specific circumstances.
