DST 1031 Exchange Guide: Tax Deferral with Delaware Statutory Trusts

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.

The structure enables you to participate alongside other investors in high-quality assets that would otherwise be out of reach individually, with typical purchase prices ranging from $30 million to $100 million. Common property types include:

• 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, allowing investors to reap the benefits of getting access to an institutional quality real estate investment at a lower minimum investment. 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 approximately $5.14 billion as of November 30, 2024, representing an 11.8% increase from the previous month. The total raised in 2023 was $5,041,949,394, which was on average for equity raised compared to the five-year average of $5.1 billion prior 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, which held that beneficial interests in a DST would be treated as replacement property for a 1031 exchange—subject to seven key restrictions. The IRS made it clear that the DST must be passive holder of real estate, and placed significant prohibitions on the trustee of the DST:

1. No Future Contributions: Once the initial offering is closed, there can be no future contributions to the DST by either current or new investors.

2. Loan Restrictions: The trustee is prohibited from renegotiating the terms of existing loans or borrowing any new funds, unless there is a loan default resulting from a tenant bankruptcy or insolvency.

3. 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.

4. Mandatory Distributions: All cash, other than the necessary reserves, must be distributed on a regular basis. When the DST receives cash from its properties, it must be distributed to the DST investors in a timely fashion (usually quarterly).

5. Limited Capital Expenditures: The Trustee of the DST is limited to making capital expenditures for normal repair and maintenance, minor non-structural capital improvements, and those required by law. Making major improvements to a property is prohibited.

6. Cash Reserve Investment Limitations: Because a DST cannot accept additional equity contributions, the trustee of a DST will often hold sizable reserves to cover future capital expenditures. This restriction precludes trustees from using these reserve funds in a speculative manner.

7. Lease Restrictions: DSTs cannot enter into new leases or renegotiate existing leases except in cases of tenant bankruptcy or insolvency. The DST enters into a long-term lease contract with an affiliated entity to operate a property at the time it is acquired; this is known as a master lease.

Illiquidity Concerns

DST properties are typically held for 3 to 10 years. The DST sponsor has total control over the length of the investment and the exit. If an investor wants to exit early, the only option is to sell the DST interest to another accredited investor. The sale would also be subject to the same 1031 exchange guidelines, or the investor would be responsible for the capital gains tax due upon the sale.

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

Brokers of DST beneficial interests typically earn up to a 7% commission on the sale of a beneficial interest in a DST. 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

DSTs are intended for somebody who is looking for a passive real estate solution, whether it's for the rest of their investment life or to leverage for a 1031 exchange in the near or long-term.

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. IRS exchange rules are very rigid, and the 1031 exchange timeline must be strictly followed to qualify for tax deferral. DSTs can provide value when timelines are compressed, as they are pre-packaged investments and DST sponsors typically have a pipeline of available properties, ensuring that investors have options to choose from within the 45-day window.

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.

Modern apartment complexes with premium amenities represent the institutional-quality properties commonly held in DST portfolios.

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 are high net worth individuals as defined by the SEC. The SEC generally defines accredited investors 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.

Why choose Bonaventure for DST investments?

At Bonaventure, we bring 25 years of experience and have co-invested over $550M alongside our clients. Our established track record and deep expertise in tax-deferred exchanges help investors navigate the complexities of DST investments with confidence. We provide comprehensive guidance throughout the entire process, from initial evaluation through investment completion. As the number one provider in our market, we consistently deliver superior results for our clients.

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.

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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.

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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.