The Ultimate Guide to a 1031 Exchange DST

Last updated on June 24th, 2021 at 03:06 pm

What is a 1031 exchange DST? | How 1031 exchange DSTs work | How a Delaware Statutory Trust (DST) works | 1031 exchange DST properties | Pros and cons | Leverage and 1031 exchange DSTs | Fees and commissions | Selling a 1031 exchange DST property | FAQs 

Using a 1031 exchange to invest in a Delaware Statutory Trust (DST) can be a great way to trade a high-maintenance rental or commercial property for a no-maintenance passive investment.

What is a 1031 exchange DST?

A Delaware Statutory Trust is a fractional-ownership real estate investment structure that allows an uncapped number of investors to jointly own real estate. Because of the way a DST runs, with a sponsor acting as a manager and making all the decisions about how the trust operates, it’s a low-maintenance (or no-maintenance) way to own real estate. 

Since a 2004 IRS ruling, a share of a DST qualifies as a “like-kind” investment in a 1031 exchange, meaning you can trade an investment or business property for a DST share and defer your capital gains. 

How does a 1031 exchange DST work?

Since a DST share is considered a like-kind property by the IRS, a 1031 exchange DST works like a traditional 1031 exchange — with a few notable differences.

First, finding a DST to invest in isn’t as easy as browsing the local listings for an investment property. Most investors find their DST with the help of a securities broker-dealer, who will present you with various investment options based on your specifications. 

Your qualified intermediary (QI) can usually help you find a good broker-dealer to help facilitate your 1031 exchange DST.

1031 exchange DST terms to know

You’ll be hearing these terms a lot: 

  • Sponsor. A company that creates and manages the DST property.
  • Broker-dealer. A company or person who markets and sells the DST to investors.
  • Non-recourse financing. The collateral on the loan is the property itself.

» Read more: 1031 exchange terms and definitions

Second, while you must abide by the standard rules of a 1031 exchange, buying into a DST as your replacement property means you’ll almost always want to use the 200% rule, which states that you can identify up to 200% of the value of your relinquished property, instead of the three property rule, which states that you can identify up to three candidates for your replacement property. 

Why? Because most DSTs will encompass more than three properties.

Just remember: If you use the 200% rule, you trigger the 95% rule, which states you must purchase at least 95% in value of the replacement properties you identified.

Finally, an IRS ruling from 2004 explicitly states that only passive real estate qualifies for a 1031 exchange DST.

😕 DON’T BE CONFUSED: If you’re considering a 1031 exchange DST, contact a qualified intermediary to help you navigate the process.

How does a Delaware Statutory Trust (DST) work?

A DST is set up by a sponsor, who names trustees to manage the assets of the trust on a day-to-day basis. The 1031 DST sponsor, who can be an individual or a company, finds and acquires property on behalf of the DST and its investors. 

The trust itself ultimately collects the investment money, arranges financing, and hires property management companies for the property. The trust also directly owns the assets, while individual investors own shares of the trust.

A DST typically pays regular returns to investors on a monthly basis — this investment isn’t just about increasing property values. The expected investment period for a DST typically runs between five and 10 years. 

A Delaware Statutory Trust is similar to an LLC in that all income and dividends are passed through and taxed on an individual level, rather than the group level. 

The advantage of the DST model over an LLC is that it’s much simpler and cheaper for a sponsor to create and operate, while still retaining the limited liability benefits of an LLC. 

What kinds of 1031 exchange DST properties are available?

DST properties generally fall into a few categories: 

🏠 Residential
According to a March 2021 white paper from industry analysts Phoenix American and Mountain Dell Consulting, multifamily properties made up 51.1% of 1031 exchange DST properties exchanged in 2020. Residential is considered a safe investment, but it also has a lower yield relative to other kinds of properties.

🏬 Retail
This is the second-largest sector for DST properties, coming in at 15.6%. This included single-tenant and multi-tenant properties.

📦 Self-storage facilities
Self-storage facilities are an increasingly popular property type for some DSTs, coming in third with a 7.3% market share.

🏭 Industrial
Industrial properties made up 6.5% of DST properties in 2020.

🏢 Office
Office space made up 5% of the DST properties in 2020. Retail and office real estate are considered higher risk, but also come with higher yields.

Because only passive real estate qualifies for a 1031 exchange DST, NNN (triple net) leaseℹ properties and master leaseℹ properties are common in a 1031 exchange DST. 

» LEARN MORE: 1031 exchange terms and definitions

An experienced qualified intermediary is the best person to help you find a 1031 DST exchange to fit your specific needs. Contact us and we’ll get you started with an expert.

DST 1031 pros and cons

Like any investment, Delaware Statutory Trusts include risks. Let’s survey some DST advantages and disadvantages.
✅ Pros❌ Cons
Low entry fee — Investment minimums can be as low as $25,000, which is less than most other real estate investments.Illiquid — DSTs are typically longer-term investments to be held for at least five to 10 years.
Diversification Rather than deploy all of your equity into a single replacement property, with DSTs you can buy pieces of multiple properties. This is useful if you’re looking to do a 1031 exchange of one large property for multiple replacements.Lack of control — Per a 2004 IRS ruling, investors must leave the daily operations of the trust to the trustees. They have no voting power.
Access The DST is one of the best ways to access properties in the $25-$125 million range, including apartment complexes, grocery stores, healthcare facilities, and other properties occupied by Fortune 500 and other AAA credit tenants*.Can’t raise new capital — Also owing to an IRS ruling, once a DST offering closes that's it. It can't accept more contributions. If the property needs additional capital expenditures like a roof or HVAC system, this can eat into profits.
Non-recourse financing* Almost all DSTs use non-recourse financing, under which the property itself serves as the collateral for the loan. You don’t have to worry about acquiring a personally-backed loan.
Readily available DSTs are plentiful and generally available for new buy-ins. (Though once the buy-in period of one DST is closed, it doesn't reopen). For investors coming up against their 45-day identification and 180-day closing timelines, this can be extremely useful.
No property management obligations — The DST sponsor is solely responsible for arranging and overseeing all asset management, rent collection, bookkeeping, repairs, etc.
Meeting exact equity and debt needs — In a 1031 exchange, you must redeploy all the equity in your existing property to your replacement, and any debt needs to match as well. The 1031 exchange DST makes it easy to meet your exact debt and equity needs.

*AAA is the highest level of creditworthiness; these tenants are the lowest default risks and have the assets to easily meet their financial commitments

*Non-recourse financing is a type of commercial lending under which the lender is only repaid out of profits from the funded project, and not from the borrower’s assets

How much leverage is used in a 1031 exchange DST?

It depends on your situation. 

One of the requirements of a 1031 exchange is that you must take on “equal or greater debt” with your replacement property. A DST broker-dealer can show you options that use varying degrees of leverageℹ, so you can find one that satisfies the requirements of your 1031 exchange.

Another advantage of a 1031 exchange DST: It almost always uses non-recourse financing. This means that the collateral on the loan is the property itself. As an investor, you don’t need to qualify for a loan or offer up a personal guarantee of your existing assets. 

This non-recourse financing usually runs seven to 20 years, and it’s locked in place before the 1031 exchange DST property goes to market. This reduces the risk that you go over the 45-day identification period

If you purchase a DST property that is leveraged, you’ll usually receive a prorated portion of the principal pay-down. This means you’re building equity in the property, which is another big advantage to the 1031 exchange DST.

DST fees and commissions

One of the most common misconceptions about Delaware Statutory Trusts (DSTs) is that it’s more expensive than directly purchasing real estate. While DSTs come with their own fees, direct real estate purchases often have hidden, uncapped fees that are much higher.

In fact, fees from a direct real estate purchase are often larger than DST fees because traditional real estate sales determine expenses as a percentage of debt plus equity. So the more valuable the property, the higher the fees. 

DSTs don’t use debt to calculate fees, so fees tend to run lower. In addition, the closing costs for Delaware Statutory Trusts are already factored into the purchase price.

So what are some typical DST fees?

Type of feeDefinitionCost
Acquisition feesThe sponsor or broker-dealer may be entitled to a fee from the trust for identifying, performing due diligence on, and securing the real estate for purchase.2% of purchase price/5-8% of equity
Disposition feesThese are fees paid when the property is sold. They're generally capped.2-3% of gross sales price
Ongoing asset management feesThe 1031 DST sponsor is responsible for ongoing management and will collect a fee for services that could include bookkeeping, process distributions, communications, or for arranging services from lenders, attorneys, underwriters, etc.1-2% of adjusted gross revenue annually
Ongoing property management feesProperty management fees are often a percentage of income generated by the property, and may be incentive based.3-4% of adjusted gross revenue
Selling costs and expensesExpenses like commissions for registered representatives and broker-dealer allowances8-10% of equity

Source: Journal of Taxation of Financial Products

What happens when a 1031 exchange DST property is sold?

When a 1031 exchange DST gets sold, you can execute another 1031 exchange and further defer your capital gains tax. 

Since a DST is considered a like-kind property, you could even do a 1031 exchange into another DST, or you could transition away from the DST and back into individual properties. 

This flexibility makes the 1031 exchange DST a powerful tax-deferral tool.

Whether you’re considering your first 1031 exchange DST, or getting ready to roll your DST shares into another 1031 exchange DST, your first step should be to contact a seasoned expert to make sure you’re on the right track. Contact us and we’ll get you started.

FAQs about 1031 exchange DSTs 

Can you 1031 exchange out of a DST?


If you decide to sell after the DST property has gone full cycle and sold, then you can use your proceeds just as you would if you’d sold an individual property. You can reinvest through another 1031 exchange, or pocket the money and pay taxes. 

If you want to 1031 exchange out of a DST before the properties have sold, it could be a little more complicated. You’d have to sell your DST share on a secondary market. As long as you find a buyer for your share, you could take that money and execute another 1031 exchange just as you would normally.

DST vs. TIC: What’s the difference? 

A tenancy in common (TIC) is a situation where multiple individuals share ownership rights to a property.

A TIC is similar to a Delaware Statutory Trust (DST), but there are some important differences — mostly in favor of the DST. 

Tenancy in common (TIC)Delaware Statutory Trust (DST)
Number of investors permittedMaximum of 35Uncapped
FinancingEach TIC investor must take out a separate loanOne loan to the DST sponsor
ManagementEach TIC investor has an equal say in how the investments are managed, which can lead to complicationsThe DST sponsor makes all decisions unilaterally

What’s the difference between a REIT and a DST?

Although they’re both passive real estate investment structures, a real estate investment trust (REIT) is a bit different from a Delaware Statutory Trust (DST). 

Many REITs are publicly traded like stocks, so it’s easier and cheaper to buy in. This makes them more volatile than DST shares, but also more liquid.

However, a DST is a public security regulated by the SEC. A REIT isn’t, making it a substantially riskier investment. 

Finally, when you buy a share of a REIT, you own part of a company that owns the real estate. So, unlike a DST, an investment in a REIT isn’t eligible to be used in a 1031 exchange.

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