Delaware Statutory Trust

DST Real Estate Solutions

A powerful tool for real estate investors to defer capital gains taxes while transitioning from active property management to passive, income-generating investments through 1031 exchanges.

What is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust is a legal entity that holds title to professionally managed, investment-grade real estate. It allows multiple investors to pool their funds and purchase fractional ownership in large-scale properties that might otherwise be out of reach.

For investors completing a 1031 Exchange, a DST is a game-changer. The IRS recognizes an interest in a DST as "like-kind" property, making it an eligible replacement property for an exchange. This provides a streamlined path to deferring capital gains taxes without the burdens of direct property management.

Passive Income

DSTs are managed by professional sponsors, providing investors with "mailbox money" without the day-to-day hassles of being a landlord.

1031 Exchange Compliant

A DST can be one of the properties—or the sole property—you identify within the 45-day identification period of your 1031 Exchange.

Diversification

Investors can acquire interests in various property types (multi-family, medical, retail, industrial, etc.) and geographic locations.

Predictable Returns

DSTs typically offer annual returns ranging from 3% to 5% over investment terms of 3, 5, 7, or 10 years.

Flexible Investment

Can be used to cover shortfalls in 1031 exchanges, allowing you to fully satisfy exchange requirements and defer entire tax liability.

Illiquid Investment

Important to note that DSTs are not liquid assets; there is no active resale market for them. Plan for long-term holding periods.

Types of Delaware Statutory Trusts

Several variations of DSTs are available, each designed to meet specific investor goals and situations.

1. The Standard DST

A Simple Path to Passive Income

This is the most straightforward DST option, ideal for investors seeking to transition from active property management to a passive, income-generating investment.

Case Study: James's $1M Property Sale

Situation: James sells his investment property for $1,000,000. After paying off his $500,000 mortgage, he has $500,000 in a 1031 Exchange account.
Solution: Instead of finding a new property and securing a new loan, James invests his $500,000 of equity into DSTs with a 50% loan-to-value (LTV) ratio.
Outcome: James successfully completes his 1031 Exchange, receives passive income and depreciation benefits without managing tenants or applying for new loans.

2. The DST-to-REIT (UPREIT) Option

Long-Term Flexibility

This option provides a potential future conversion from a private DST investment into shares of a public Real Estate Investment Trust (REIT).

How it Works

  • Structure similar to standard DST initially
  • After 2-3 years, option to convert to REIT shares
  • REITs offer potential for higher income and liquidity

Key Difference

While you can use a 1031 Exchange to exit a standard DST, you cannot exchange out of REIT shares. This option is for investors who prioritize long-term income and potential liquidity over the ability to perform future tax-deferred exchanges.

3. The Zero-Coupon DST

Maximizing Leverage to Meet Exchange Rules

This specialized DST is designed for investors who need to satisfy the debt replacement requirement of their 1031 Exchange but do not need current income from the investment.

Case Study: Betty's Exchange Challenge

Situation: Betty sells property for $750,000 with $300,000 mortgage, wants to buy $500,000 condo with $400,000 exchange funds and $100,000 new mortgage.
Problem: Short $50,000 on equity replacement and $200,000 on debt replacement, resulting in significant tax bill.
Solution: Invest remaining $50,000 into high-leverage Zero-Coupon DST with 80% LTV, purchasing $250,000 interest ($50,000 equity + $200,000 assumed debt).

4. The Special (Monetization) DST

Unlocking Equity with Big Depreciation Upside

This is an advanced strategy for high-net-worth investors looking to "cash out" of a highly appreciated asset tax-free and reset their depreciation basis on a new property.

Case Study: Bob & Jean's $10M Building

Situation: Own debt-free $10M apartment building (bought for $2M, depreciated to $1M basis), want to buy $8.35M warehouse with higher depreciation benefits.
Process: Sell building → Purchase $10M DST interest → DST returns 86% ($8.6M) as tax-free cash-out refinance → Use $8.35M to buy warehouse with new full cost basis.
Outcome: Unlocked equity tax-free, acquired new asset with massive depreciation upside, combining DST depreciation with full warehouse depreciation.
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