Commercial real estate offers strong potential for income and appreciation, but direct ownership can be costly and management-intensive for individual investors. Delaware Statutory Trusts, or DSTs, provide a way to invest in institutional-quality commercial properties with lower minimum investments and passive management.

What is a DST?

A Delaware Statutory Trust is a legal entity that allows multiple investors to pool their capital for passive, fractional ownership of institutional-quality commercial real estate. A DST is established by a DST sponsor, typically a large real estate group. The sponsor acquires the property and then offers equity interests to individual investors to raise capital until the property is owned solely by these investors.

DSTs are professionally managed, providing truly passive ownership for those looking to avoid the “three T’s” of active management: trash, toilets, and tenants. Common property types in DSTs include multifamily rentals, office spaces, industrial facilities, retail centers, senior housing communities, medical office buildings, and self-storage centers. While each DST generally holds a single asset type, investors can diversify their portfolios by investing in multiple DST offerings.

Investing in a DST

DSTs are an attractive investment option for those seeking passive income, whether they are preparing for retirement or want to enjoy investment benefits without the demands of active management. However, since DSTs are not widely marketed, finding suitable offerings often requires guidance from industry professionals. DST sponsors collaborate with securities broker-dealers and 1031 exchange advisors to present offerings to qualified investors.

Only accredited investors are eligible to invest in a DST. This means having a net worth of at least $1 million, excluding primary residences, or an average annual income of at least $200,000 individually or $300,000 jointly. Minimum investments in DSTs usually start at $100,000, which is significantly lower than the cost of purchasing commercial real estate outright. DST properties are typically held for three to ten years, with the sponsor retaining complete control over the length of the investment and the exit. The only way for an investor to exit a DST early is to sell their interest to another accredited investor.

1031 Exchanges with DSTs

DSTs are considered like-kind and equivalent to direct ownership for tax purposes, making them eligible for 1031 exchanges. This allows investors to defer capital gains taxes from the sale of investment property by reinvesting the proceeds into a DST. The structure and timeline for a 1031 exchange remain the same as with other replacement property types: investors must identify the DST(s) within 45 days and complete the purchase within 180 days of the sale. Additionally, proceeds from the sale of a DST can be exchanged again in a subsequent 1031 exchange.

Advantages of a DST

Delaware Statutory Trusts offer several benefits as replacement property in a 1031 exchange, including:

• Deferral of capital gains taxes
• Potential for stable income payments
• No day-to-day management
• Portfolio diversification across markets and asset types
• Access to institutional-quality deals typically unavailable to individual investors

Disadvantages of DSTs

As with any real estate investment, Delaware Statutory Trusts carry certain risks, including the potential for a loss of principal and uncertain returns. Additionally, some features of DSTs may not align with every investor’s goals. Because DSTs are designed as long-term, income-focused investments, it’s important to consider the following drawbacks:

• Lack of management control
• Lack of liquidity

DSTs present a compelling option for accredited investors seeking to complete a 1031 exchange while minimizing active management responsibilities.  By offering access to institutional-grade assets, portfolio diversification, and potential tax advantages, DSTs can simplify the reinvestment process and provide a path to truly passive income. As with any investment, it is essential to conduct thorough due diligence and consult with tax and industry professionals to ensure this strategy aligns with the individual investor’s financial goals.

The information presented is for information purposes and is not intended as investment, legal, tax or compliance advice. Land 1031 does not offer or sell investments or provide investment, legal, or tax advice.

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