# Delaware Statutory Trust (DST): A Complete 1031 Guide

> How a Delaware Statutory Trust works in a 1031 exchange: the IRS rules, the seven limits, master leases, debt, fees, exits, taxes, risks and who it fits.

Source: https://baker1031.com/learn/dst-guide


By Jerry Baker, Founder, Baker 1031 Investments. Updated October 28, 2026. Topic: Delaware Statutory Trusts. Draft for review; not yet approved by Aurora Securities.

## The short answer

A Delaware Statutory Trust (DST) is a trust that owns income-producing real estate and sells fractional shares of it to many investors. Under IRS Revenue Ruling 2004-86, a properly structured DST interest can qualify as replacement property in a 1031 exchange, and the median minimum investment in my offering records is $100,000.

## Key takeaways

- A DST is a trust formed under Delaware law that holds one or more properties. You buy a "beneficial interest" in the trust, and the trust holds the deed.
- The IRS treats a properly structured DST as a grantor trust. That means you are treated as owning a slice of the real estate itself, which is why it can work in a 1031 exchange.
- To keep that tax treatment, the trustee must follow strict limits. It cannot raise new money, refinance, sign new leases or reinvest sale proceeds. Those limits make a DST passive, but also rigid.
- A DST interest is also a security. Most are sold only to accredited investors under a private placement memorandum. They are illiquid, you have little control, distributions are not guaranteed, and you can lose your entire investment.
- Your share of a DST's loan counts toward the debt you need to replace in an exchange. Running the debt math early is the single most useful thing you can do.
- In my offering records as of October 2026, 36 of 76 DST offerings (47%) use no debt at all, and the median minimum investment is $100,000.

## What is a Delaware Statutory Trust, in plain words?

A Delaware Statutory Trust is a legal trust created under Delaware state law. It exists to hold property for the people who own interests in it. Those owners are called beneficial owners.

Picture a 300-unit apartment community worth $80 million. Few people can buy that alone. A DST lets a few hundred investors pool their money and own it together. Each investor holds a share of the trust in proportion to the money they put in.

Delaware's statute, [Title 12, Chapter 38 of the Delaware Code](https://delcode.delaware.gov/title12/c038/sc01/index.html), defines a statutory trust as "an unincorporated association" created by a governing document. The same chapter says beneficial owners generally get the same limit on personal liability that stockholders of a Delaware corporation get. In plain terms, your personal assets are generally not on the hook for the trust's debts. You can still lose all of the money you put in.

You do not need to live in Delaware to invest. The property can sit in any state. Delaware is simply where the trust is formed, because its trust law is well tested and flexible.

A 1031 exchange is the tax rule that makes DSTs useful to most investors who buy them. It lets you sell investment real estate and buy other investment real estate without paying capital gains tax right away. The tax is deferred, not erased. The rule comes from [Section 1031 of the Internal Revenue Code](https://www.law.cornell.edu/uscode/text/26/1031). It says no gain is recognized when real property held for investment or business use is exchanged "solely for real property of like kind."

## What do you actually own when you buy into a DST?

You own a beneficial interest in a trust, and the trust owns the property. That sounds like a technicality until you see how many parties sit between you and the building. My guide to [how DSTs work](/learn/how-dsts-work) covers each party in more depth.

A typical DST has five or six of them:

| Party | Who it usually is | What it does |
|---|---|---|
| The trust (the DST) | A special-purpose Delaware statutory trust | Holds title to the property and is the borrower on any loan |
| Delaware trustee | A trust company based in Delaware | Meets the state rule that every statutory trust have a Delaware trustee; its duties are mostly administrative |
| Signatory trustee (sometimes called the managing trustee) | Usually an affiliate of the sponsor | Signs for the trust and makes the narrow decisions the trust agreement allows |
| Manager or asset manager | Usually an affiliate of the sponsor | Oversees the property, the lender relationship, reporting and distributions |
| Master tenant (if there is a master lease) | Usually an affiliate of the sponsor | Leases the whole property from the trust and subleases it to the real tenants |
| Lender | A bank, insurance company or securitized lender | Holds a mortgage on the property, usually non-recourse to investors |

The sponsor is the real estate company that found the property, arranged the loan, wrote the offering document and will run the asset. In nearly every DST I have reviewed, the sponsor's affiliates fill the signatory trustee, manager and master tenant roles. That concentration is the main reason I spend as much time on the sponsor as on the building. I wrote a separate guide on [what happens if a DST sponsor goes bankrupt](/learn/what-happens-if-a-dst-sponsor-goes-bankrupt), because it is a question every investor should ask.

Two facts about your interest matter more than the rest. First, it is a security. You buy it through a broker-dealer, under a private placement memorandum (PPM), in a private offering exempt from SEC registration. Most offerings require you to be an [accredited investor](/learn/accredited-investor). Second, for federal income tax purposes it is treated as real estate. Both are true at once. Much of the confusion about DSTs comes from holding only one of those ideas.

A PPM is the legal document that describes the deal. It covers the property, the loan, the fees, the conflicts of interest and the risks. It is long, and parts of it are dull. Read it anyway, and read the risk section twice.

## Why does the IRS treat a DST interest as real estate?

The answer is [Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf), which the IRS issued in 2004. The ruling studied a simple fact pattern. Two unrelated people bought interests in a Delaware statutory trust. The trust owned one rental property, subject to a mortgage, leased to one tenant under a net lease. A net lease is one where the tenant pays the taxes, insurance and upkeep on top of rent.

The trust agreement sharply limited what the trustee could do. Based on those limits, the IRS reached three conclusions.

1. **The trust was an "investment trust," not a business.** Under the Treasury rule in [26 CFR 301.7701-4(c)](https://www.law.cornell.edu/cfr/text/26/301.7701-4), an investment trust is not treated as a trust if the trust agreement gives a "power to vary the investment." Because this trustee had no such power, the trust stayed a trust.
2. **The trust was a grantor trust.** The investors were treated as owning an "aliquot portion," meaning a fractional share, of the trust's assets for income tax purposes.
3. **The exchange qualified.** A taxpayer could exchange real property for an interest in the trust without recognizing gain under Section 1031, as long as the other rules of the section were met.

Point one carries the whole structure. If the trustee had broad powers, the trust would look like a business entity. A business entity with several owners is usually taxed as a partnership. A partnership interest is not real property, so it cannot be 1031 replacement property.

So the entire tax result depends on the trust staying passive for as long as it exists. Every restriction you will read about below exists to keep the trust from looking like a business.

## How did DSTs replace TICs?

Before 2004, most fractional 1031 investments were tenant-in-common (TIC) deals. In a TIC, each investor received a deed to an undivided share of the property. The IRS set out ruling guidelines for TICs in [Revenue Procedure 2002-22](https://www.irs.gov/pub/irs-drop/rp-02-22.pdf).

Those guidelines created two practical problems. They limited a TIC to no more than 35 co-owners. They also required unanimous approval of the co-owners for any sale, lease or re-lease, and for renegotiating the mortgage.

Getting 35 people to agree on anything is hard. Lenders also disliked lending to dozens of separate owners, each of whom had to sign. When the real estate market fell around 2008, many TIC owners were stuck exactly there. One holdout could block a sale or a loan fix.

The DST solves both problems. The lender deals with one borrower, the trust. One trustee makes the narrow decisions allowed. The 35-owner limit in Rev. Proc. 2002-22 does not apply. That is why DSTs became the standard fractional 1031 structure in the years after the TIC market slowed. The trade is that you give up your vote and take a seat in the back.

## What are the "seven deadly sins" of a DST?

"Seven deadly sins" is industry shorthand for the trustee limits described in Rev. Rul. 2004-86. The ruling itself does not number them or use that phrase. People in the business boiled the facts down to this list:

1. **No new capital.** Once the offering closes, the trust cannot accept more money from current or new investors.
2. **No new debt and no loan changes.** The trustee cannot renegotiate the existing loan or borrow new money.
3. **No reinvesting.** The trustee cannot swap the property for other property or reinvest sale proceeds. When the property sells, the cash goes out to investors.
4. **Only limited improvements.** The trustee can handle normal repairs and minor, non-structural changes. It cannot make larger changes unless the law requires them.
5. **Cash sits only in short-term holdings.** Between distributions, cash can be held only in short-term U.S. government obligations or bank certificates of deposit that mature before the next distribution date.
6. **Cash must be paid out.** All available cash, less reserves, must be distributed on a regular schedule. In the ruling's facts, that is quarterly.
7. **No new or changed leases.** The trustee cannot renegotiate the lease or lease to new tenants, except if the tenant goes bankrupt or becomes insolvent.

Read that list from a property manager's chair and you will see the problem. Real buildings need things. A roof fails. A big tenant wants to renew at a different rent. The loan comes due in a year when rates are high. A plain DST can do almost nothing about any of these.

That is the price of the tax treatment. Sponsors handle it with three tools: reserves raised at the start, a master lease, and a "springing LLC" clause. You should understand all three before you invest. They are where the real-world flexibility comes from, and where some of the risk comes from too.

Because the trust cannot raise money later, the sponsor usually sets aside a capital reserve from the offering proceeds at closing. The size of that reserve, compared with the age and condition of the building, tells you a lot. I look for a reserve that matches the property condition report. A round number that happens to look generous does not impress me on its own.

## What is a master lease, and why do so many DSTs use one?

A master lease is how a DST can hold a property with many tenants without breaking the seventh limit.

Here is how it works. The trust leases the entire property to a single company, the master tenant, under one long-term lease. The master tenant is usually a sponsor affiliate. The master tenant then signs, renews and renegotiates all the individual leases with residents or businesses.

An apartment community turns over leases every month. A self-storage facility turns over customers every week. The trust itself never signs one of those leases. It just collects rent from the master tenant.

Master lease rent usually has two parts. Base rent is a fixed amount sized to cover the trust's loan payments and target distributions. Additional rent, sometimes called bonus rent, is tied to the property's revenue above some level. The master tenant keeps what is left after paying the trust and the operating costs.

A master lease can look like a promise to pay rent no matter how the building performs. It is only as strong as the master tenant's finances. Master tenants are usually single-purpose companies with limited capital. Sometimes that capital is a cash deposit. Sometimes it is just a promissory note from the sponsor. If the property's income falls far enough, the master tenant can run out of money, and the trust's income falls with it.

The PPM explains how the master tenant is funded. Read that section slowly. If the explanation is vague, ask.

Single-tenant net lease DSTs often have no master lease at all. Picture a building leased for 15 years to one company that pays the taxes, insurance and upkeep. The trust is the landlord directly. That simplicity is one reason I find them easier to underwrite. The trade-off is that everything rides on one tenant's credit.

## What is a springing LLC?

The springing LLC is the emergency exit from the seven limits.

Most DST trust agreements include a clause for when the trust must do something it is not allowed to do. Examples include refinancing a maturing loan, re-leasing a vacant building, funding a major repair or accepting new capital. In that case, the trust can convert into a Delaware limited liability company (LLC). Your beneficial interest becomes an LLC membership interest. The LLC can then do the things the trust could not.

Three things follow, and the third one is the one people miss.

First, the conversion is generally designed so it is not a taxable event in itself. Your deferred gain is meant to stay deferred. Your CPA should confirm how a conversion would apply to you.

Second, the property is now run under an LLC agreement, usually by the same sponsor affiliate, with broader powers. That is the whole point of converting.

Third, you now own an interest in an entity that is generally taxed as a partnership. A partnership interest is not real property for Section 1031. When the LLC eventually sells, you may not be able to do your own 1031 exchange with your share, the way you could from a DST interest. For an investor who planned to keep exchanging for decades, a springing LLC conversion can end that plan.

Delaware law and the trust agreement govern how a conversion gets approved. Some trust agreements let the signatory trustee convert on its own judgment. Others require an investor vote. Most loan documents also require the lender's consent. Find out which applies before you invest, not after.

## What kinds of DSTs are there?

DSTs come in more shapes than people expect. These are common ones:

| Structure | How it usually works | What to watch |
|---|---|---|
| Single-tenant net lease (retail, medical, industrial) | One tenant on a long lease pays most expenses; often no master lease | Tenant credit, lease term left versus the planned hold, what happens when the lease ends |
| Multifamily (apartments) | Master lease to a sponsor affiliate; a property manager runs leasing | Master tenant funding, rent growth assumptions, rising insurance and property taxes |
| Industrial or distribution | One or several buildings and tenants, sometimes with a master lease | Concentration in one tenant or market, cost to re-lease space |
| Self-storage | Master lease; short customer rentals | New supply nearby, operator quality |
| Senior housing and healthcare | Master lease plus a third-party operator | Operator risk; more exposure to an operating business than other types |
| Multi-property portfolio | Several properties in one trust | Diversification helps, but you take on every property's problems |
| High-leverage or "zero cash flow" DST | Debt sized close to property value, often a long net lease that covers loan payments and little else | Used mainly to replace a large mortgage; little or no distribution; serious risk if the tenant leaves |
| 721 DST | Sponsor is tied to a REIT that may later buy the property for operating partnership units | A path into a REIT; loss of future 1031 eligibility if the 721 happens |

The 721 DST deserves a short note. A real estate investment trust (REIT) is a company that owns many properties. Some sponsors are affiliated with a REIT. Their DSTs may later be folded into that REIT through a Section 721 exchange. I compare the two structures side by side in my [DST vs. REIT guide](/learn/dst-vs-reit).

Capital structure varies just as much. Some DSTs carry no debt. Others borrow a moderate share of the price. A few are built mostly with debt for the narrow job of replacing a large mortgage. Whatever the loan is, it is put in place before the offering, and the trust cannot change it later.

## How does debt inside a DST work?

The loan sits at the trust level. You do not sign it. It is generally non-recourse to investors. Non-recourse means the lender can take the property if the loan defaults, but generally cannot come after your personal assets.

Non-recourse loans come with "carve-outs," sometimes called bad-boy provisions. They cover things like fraud, misused funds, unauthorized transfers or a voluntary bankruptcy filing. If one occurs, the loan can become recourse to whoever signed the carve-out guaranty. In a DST, that is the sponsor or an affiliate, not you. A sponsor with a weak balance sheet matters to the lender here, and so it matters to you.

Because the trust cannot refinance, the loan term usually lines up with the sponsor's expected hold. If a DST has a 10-year fixed-rate loan, the sponsor plans to sell before year 10. Whether it can sell on time depends on the market then. If it cannot, the choices are a loan extension the documents allow, a springing LLC conversion, or a sale in a weak market. I check the loan maturity against the business plan in every PPM.

Loan-to-value, or LTV, is the loan amount divided by the property's value. A 50% LTV means half the price was borrowed. Debt cuts both ways on your equity. Here is a hypothetical with made-up round numbers that do not represent any offering:

- A trust buys a $10,000,000 property with $5,000,000 of debt and $5,000,000 of investor equity.
- If it later sells for $11,000,000, the loan is repaid and equity receives $6,000,000 before costs. That is a 20% gain on a 10% rise in value.
- If it sells for $9,000,000, equity receives $4,000,000. That is a 20% loss on a 10% drop in value.
- If it sells for $5,000,000, equity receives nothing.

Lenders often add cash management rules, too. Rents go into a lender-controlled account. If income falls below a coverage test, extra cash is held in reserve instead of being paid out. That is a common reason distributions get cut in a leveraged DST, even when the loan is not in default.

## How do you buy into a DST in a 1031 exchange, step by step?

The mechanics are close to buying any replacement property. You sign a subscription agreement instead of a purchase contract. The tax rules for the deadlines and the middleman come from the Treasury regulation at [26 CFR 1.1031(k)-1](https://www.law.cornell.edu/cfr/text/26/1.1031(k)-1). Here are the steps I walk clients through.

### Step 1: Line up a qualified intermediary before you sell

A [qualified intermediary (QI)](/learn/qualified-intermediary) is a company that holds your sale money during the exchange. It signs a written exchange agreement with you that limits your access to the funds. If the cash touches your own account, the exchange can fail.

The IRS's [like-kind exchange fact sheet](https://www.irs.gov/pub/irs-news/fs-08-18.pdf) says you cannot act as your own facilitator. Neither can your real estate agent, accountant or attorney. The same fact sheet notes that some intermediaries have gone bankrupt or failed to meet their duties. Choose yours carefully, and ask how it protects your funds.

### Step 2: Confirm you qualify as an investor

Most DSTs are private placements under Regulation D, and most accept only accredited investors. Under the [SEC's accredited investor rules](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3), an individual generally qualifies with one of these:

- Income above $200,000 in each of the past two years ($300,000 with a spouse or spousal equivalent), with a reasonable expectation of the same this year.
- Net worth above $1 million, alone or with a spouse or spousal equivalent, not counting your primary home.
- A Series 7, 65 or 82 license held in good standing.

### Step 3: Close the sale of your old property

Your old property is called the relinquished property. The day it closes, two clocks start at once. You have 45 days to identify replacement property. You must close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. The two periods run at the same time, not back to back.

If your return would be due before day 180, extending it keeps the full 180 days. The IRS fact sheet says these deadlines cannot be extended for hardship, except in presidentially declared disasters.

### Step 4: Review offerings and read the PPMs

This is where most of the real work happens. We look at the property, the sponsor, the loan, the fees and the exit terms together. I tell you why I am considering each offering, what I like about it, and where I have reservations.

### Step 5: Identify in writing within 45 days

You send a signed, written identification to your QI by midnight of day 45. The Treasury rules give you three ways to do it:

- **Three-property rule:** Up to three properties of any value.
- **200% rule:** Any number of properties, as long as their total value does not exceed 200% of what you sold.
- **95% exception:** If you go over both limits, you must actually acquire at least 95% of the total value you identified.

A DST interest is identified like any other property. You name the trust and the property it owns.

### Step 6: Sign the subscription documents

You complete a subscription agreement and an investor questionnaire. The broker-dealer reviews whether the investment is suitable for you. My team coordinates the paperwork with the sponsor and your QI.

### Step 7: The QI wires funds and you close within 180 days

The QI sends your exchange funds directly to the DST. You receive your beneficial interest and the closing documents. Because the trust already owns the property, closing can often take two to three business days once paperwork, funding and approvals are complete.

### Step 8: Report the exchange and keep records

You report the exchange on [IRS Form 8824](https://www.irs.gov/forms-pubs/about-form-8824), which the IRS says is used to report "each exchange of business or investment property" for like-kind property. [IRS Publication 544](https://www.irs.gov/publications/p544) also covers like-kind exchanges and qualified intermediaries. Keep your old depreciation records, because your CPA will need them.

### Why DSTs work well as backups

DSTs are also useful as backups in an identification letter. Say you identify a duplex you want to buy, plus a DST interest as a second option. If the duplex falls through on day 60, the DST is already identified. It can often close in days, because there is no inspection, no appraisal contingency and no seller who can back out. That is not certain, since offerings fill up and close to new money. But it is a common way DSTs are used outside of being the main plan.

## A worked example: sizing a DST for both equity and debt

This is a hypothetical example with simple numbers. It is not tax advice, and your CPA should run your real figures.

Say you sell a fourplex in Oakland for $2,400,000. You have a $900,000 loan on it. Selling costs such as commissions, transfer tax and escrow come to $120,000.

- **Net sale price:** $2,400,000 − $120,000 = **$2,280,000.** To defer all the gain, your replacement property generally needs to be worth at least this much.
- **Cash to your QI:** $2,280,000 − $900,000 = **$1,380,000.** To defer all the gain, all of this needs to go into replacement property.
- **Debt paid off:** **$900,000.** You need to replace it with new debt or with extra cash of your own.

Cash you keep is called "boot." The IRS fact sheet explains that receiving cash, relief from debt, or property that is not like-kind can trigger taxable gain in the year of the exchange. Boot is taxed even when the rest of the exchange qualifies.

### Plan A: A DST with a 40% loan

Now say you put the full $1,380,000 into a DST whose loan equals 40% of its purchase price. Your equity is 60% of your share.

- Your share of the property: $1,380,000 ÷ 0.60 = **$2,300,000**
- Your share of the trust's debt: $2,300,000 × 0.40 = **$920,000**

Both tests pass. $2,300,000 of value is more than $2,280,000. $920,000 of debt is more than $900,000. In a 1031 exchange, your share of a DST's debt generally counts as replacement debt.

### Plan B: An all-cash DST

Put the same $1,380,000 into an all-cash DST instead. Your replacement value is only $1,380,000. You fall $900,000 short on value. That shortfall could be taxable unless you add outside cash or buy other leveraged property alongside the DST.

### Plan C: A mix of the two

Many clients want some debt, but not too much. Here is a split with half the money in each:

| Piece | Your equity | Your share of debt | Your share of value |
|---|---|---|---|
| 40% LTV DST | $690,000 | $460,000 | $1,150,000 |
| All-cash DST | $690,000 | $0 | $690,000 |
| **Total** | **$1,380,000** | **$460,000** | **$1,840,000** |

In Plan C you reinvested all your cash, but your total value is $1,840,000. That is $440,000 short of $2,280,000. You would need to shift the mix toward the leveraged DST, add cash, or accept some taxable gain.

This is a common sizing error. Someone picks a DST they like without running the debt math. Then they discover on day 40 that it does not replace their mortgage. Have your CPA check the numbers before you commit.
### How much tax is being deferred?

Suppose your adjusted basis in the fourplex is $550,000 after years of depreciation. Of that, $250,000 is depreciation you took. Your gain is $2,280,000 − $550,000 = $1,730,000.

For 2026, the IRS's inflation update in [Revenue Procedure 2025-32](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf) sets the top of the 15% capital gains bracket at $613,700 for married couples filing jointly. Above that, the 20% rate applies. Here is a rough federal and California estimate for a high-income seller:

- $250,000 of depreciation, taxed as "unrecaptured Section 1250 gain" at up to 25%: $62,500. The [IRS explains](https://www.irs.gov/taxtopics/tc409) that this portion is taxed at a maximum 25% rate.
- $1,480,000 of remaining long-term gain at 20%: $296,000
- The 3.8% [net investment income tax](https://www.law.cornell.edu/uscode/text/26/1411) on $1,730,000: $65,740
- California tax at rates up to 13.3% on $1,730,000: as much as $230,090. That top rate is a 12.3% bracket plus a 1% surcharge on income over $1 million, as [this CPA firm summary](https://www.hco.com/insights/california-income-tax-rates-refunds-payment) explains.

That adds up to roughly $654,000, or about 47% of your $1,380,000 in cash. Your actual number depends on your other income and deductions.

The exchange defers that tax. It does not erase it. The deferred gain stays attached to your replacement property. California also keeps track of it. When you exchange California property for property in another state, the Franchise Tax Board says [Form FTB 3840](https://www.ftb.ca.gov/forms/2025/2025-3840-instructions.html) "must be filed for the taxable year of the exchange" and for each later year until the deferred California gain is recognized.

Please confirm the details of your exchange with your CPA or tax attorney and your qualified intermediary before you sell. Nothing in this guide is tax or legal advice.

## What does a DST cost?

More than most people assume, and most of it is paid at the start. Sponsors must show where your money goes in the PPM, usually in a table called "Estimated Use of Proceeds." Find that table before you read anything else.

Costs fall into three groups.

**Up front, out of your equity.** These include selling commissions to the broker-dealer, a dealer-manager or marketing fee, offering and organization costs for legal and accounting work, a sponsor acquisition fee, financing fees and the reserve. The sponsor may also buy the property first and then sell it to the trust at a higher price. That markup is disclosed, but you have to look for it.

**Over the life of the trust.** These include an asset management fee to the sponsor and a property management fee. In a master lease, the master tenant may also keep the spread between what tenants pay and what it pays the trust.

**At the end.** Many DSTs charge a disposition fee when the property sells. Some give the sponsor a share of profits above a set return to investors, often called a "promote."

Here is a purely hypothetical illustration with made-up round numbers. It does not represent any offering:

| Item | Hypothetical amount | Share of $10M raised |
|---|---|---|
| Equity raised from investors | $10,000,000 | 100.0% |
| Selling commissions | $600,000 | 6.0% |
| Dealer-manager and marketing | $150,000 | 1.5% |
| Organization and offering costs | $150,000 | 1.5% |
| Sponsor acquisition fee | $200,000 | 2.0% |
| Financing fees | $50,000 | 0.5% |
| Capital reserve | $250,000 | 2.5% |
| Left to buy real estate | $8,600,000 | 86.0% |

In this example, $1,150,000, or 11.5% of investor equity, goes to fees and offering costs on day one. Another 2.5% sits in reserve. The property has to rise in value just to get investors back to where they started. I go through this table with every client. Someone who buys a fourplex directly might pay 2% to 3% in closing costs and never think about a load at all.

The regulator now called FINRA addressed this in [Notice to Members 05-18](https://www.finra.org/rules-guidance/notices/05-18), which covered fractional real estate sold for 1031 exchanges. It told firms to consider "whether the fees and expenses associated with TIC transactions outweigh the potential tax benefits." The same test applies to DSTs, and I agree with it.

I do not think fees disqualify DSTs. You are paying for institutional sourcing, financing, management and reporting that you would otherwise do yourself or go without. But the fees are real, they come out of your money, and you should compare them across offerings the way you would compare cap rates.

## How long will your money be tied up?

Plan on the whole hold, and assume you cannot get out early.

Most PPMs describe an expected holding period, often between five and ten years. But the sponsor decides when to sell, and the market decides whether it can. A DST has no redemption feature. There is no exchange to list your interest on.

The SEC's [investor bulletin on private placements](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/private) says most private placement securities are restricted. It warns that "you should be prepared to hold the securities indefinitely." A small secondary market for DST interests exists, but buyers there usually pay a discount. The trust agreement also usually requires sponsor consent to transfer.

A sensible rule is to invest only money you could leave in place for ten years or longer without strain. That is not a scare line. It is the honest planning horizon for an illiquid asset whose exit date someone else controls.

Your interest can pass to your heirs at death. It can usually be moved into a trust you control for estate planning. Divorce, partnership splits and estate settlements are harder, because one interest is hard to divide in a hurry.

## How do you get out of a DST?

When the property sells, the trust distributes the net proceeds to investors pro rata, meaning in proportion to each person's share. At that point you have the same menu as any real estate owner.

- **Exchange again.** Each investor can do a separate 1031 exchange with their share of the proceeds. You can go into another DST, a property you buy directly, or a mix. This is the biggest practical advantage of DSTs over partnership-based funds. You need a QI lined up before the sale closes, so watch for the sponsor's notice. My guide to [how to 1031 out of a DST](/learn/dst-full-cycle-and-exit) walks through that sale.
- **Take the cash and pay the tax.** The deferred gain from every exchange you have done, plus any gain inside the DST, becomes taxable.
- **Move into a REIT through a 721 exchange.** If the DST has a REIT-affiliated sponsor, the REIT's operating partnership may acquire the property in exchange for operating partnership units. [Section 721](https://www.law.cornell.edu/uscode/text/26/721) generally lets that happen without current tax. But it is a one-way door. Those units cannot be exchanged again under Section 1031, and converting them to REIT shares or cash is generally taxable.
- **Hold until death.** Under [26 U.S.C. 1014](https://www.law.cornell.edu/uscode/text/26/1014), heirs generally receive a basis equal to "the fair market value of the property at the date of the decedent's death." That can wipe out the deferred gain for them. Congress can change this rule, and it has considered changes more than once.

That last point can matter most to people in their 60s and 70s. They may want to stop managing property, keep the gain deferred, and leave something simpler for their kids.

For 2026, Rev. Proc. 2025-32 sets the federal estate tax basic exclusion at $15,000,000 per person. For estates below that line, the step-up matters more than the estate tax does. Your estate attorney should weigh in on both.

## How is a DST taxed year to year?

Because the trust is a grantor trust, it does not file a partnership return or send you a K-1. Instead, the sponsor sends an annual statement showing your share of rental income, expenses, interest and depreciation. You or your CPA report it, often on Schedule E, as if you owned that slice of the building directly.

Some details matter more than others.

- **Depreciation.** Depreciation is a yearly tax deduction for the wear and tear on a building. Your exchanged basis generally carries over from your old property and keeps depreciating on the old schedule. Any extra basis from new debt or new cash starts a new schedule.
- **Bonus depreciation.** The 2025 tax law restored 100% bonus depreciation for qualified property acquired after January 19, 2025, and the IRS issued interim guidance in Notice 2026-11, as [RSM explains](https://rsmus.com/insights/tax-alerts/2026/restored-bonus-depreciation-irs-interim-guidance-obbba-rules.html). Some sponsors provide cost segregation studies. How much of that benefit reaches you depends on how your basis splits between carried-over and new. Ask your CPA.
- **State returns.** You may have to file a nonresident return in each state where the trust owns property. A California resident whose DST owns property in Texas has no Texas return to file, because Texas has no personal income tax. If the same trust owned property in Oregon, that investor would probably file an Oregon nonresident return.
- **Passive income.** Rental income from a DST is generally passive. Passive losses can offset passive income but generally not wages.
- **Cash versus taxable income.** Your cash distributions and your taxable income are different numbers. Depreciation often makes taxable income lower than the cash you receive in the early years.

Your CPA will want the sponsor's annual statement as early as possible, so ask the sponsor when it usually goes out.

## DST vs. owning a rental vs. TIC vs. REIT

Here is how a DST compares with the other common choices. These are general features, and every deal is different.

| Feature | DST | Owning a rental directly | TIC | REIT |
|---|---|---|---|---|
| What you own | Beneficial interest in a trust | The whole property | Deeded fractional share | Shares of a company |
| Can be 1031 replacement property | Yes, if properly structured | Yes, if held for investment or business | Yes, if properly structured | No, REIT shares are stock |
| Who makes decisions | Sponsor and trustee, within strict limits | You | Co-owners, unanimous for major decisions | Management and the board |
| Owner limit | Not capped at 35 | Just you or your partners | Up to 35 under Rev. Proc. 2002-22 | Many shareholders |
| Day-to-day work for you | None | All of it, or you hire a manager | Little, but votes are needed | None |
| Loan | Arranged by sponsor; non-recourse to you | You qualify and usually sign | Each owner often signs | Company-level debt |
| Can refinance or re-lease | No, without converting | Yes | Yes, if all owners agree | Yes |
| Liquidity | Very limited until the sale | You can sell, but it takes months | Very limited | Listed REITs trade daily; non-traded REITs limit redemptions |
| Depreciation flows to you | Yes, your share | Yes, all of it | Yes, your share | No; you receive dividends |

The table shows the core trade. A DST gives up nearly every form of control that direct ownership offers. In return, you get passive income potential, professional management and a structure that can work as 1031 replacement property.

## Who is a DST a good fit for, and who isn't it?

DSTs fit a fairly specific person. You might be that person if:

- You are selling investment property, you have a large deferred gain, and you want to keep deferring it.
- You are tired of managing tenants, toilets and contractors, and you are willing to give up control to stop.
- You need a reliable backup in your 45-day identification, or you need to replace a specific amount of debt.
- You want to split a large exchange across several properties, tenants and markets rather than one building.
- You can leave the money alone for the full hold without needing it for something else.
- You are thinking about estate planning and want an asset that is simpler for heirs to hold.

A DST is probably the wrong tool if:

- You might need the money in the next several years.
- You enjoy running property and believe you can add value by doing it. A DST takes that away entirely.
- Your gain is small. If the deferred tax is modest, the load and illiquidity may cost more than the tax you defer.
- You are not accredited. Most DSTs are not open to you.
- You want to refinance and pull cash out later. A DST cannot.
- You have a strong view on a local market you know well. A good direct purchase there might suit you more.

I will say plainly that I steer people away from DSTs often. If you would rather own a building you can drive by and improve, buy the building.

## Mistakes to avoid with DSTs

I have watched investors make each of these. Most are easy to avoid with a little planning.

1. **Waiting until day 44.** Late planning leads to rushed choices. Start before your sale closes, ideally before you list.
2. **Skipping the debt math.** As the worked example shows, an all-cash DST alone may leave you short on value. Run both the equity and the debt numbers early.
3. **Chasing the highest projected distribution.** A high projected rate can mean more debt, a weaker tenant or a thinner reserve. Ask why the rate is high.
4. **Not reading the PPM.** The fees, risks, conflicts and exit terms are all in there. Read the risk factors at least twice.
5. **Ignoring the master tenant's funding.** A master lease is only as strong as the company behind it. Find out what capital it actually has.
6. **Overlooking the exit terms.** Know whether a 721 exit is optional, mandatory or not offered. It shapes every choice you have later.
7. **Missing the springing LLC clause.** Learn who can trigger a conversion and what it would do to your future exchanges.
8. **Putting everything in one deal.** Consider spreading your money across properties and sponsors, within the identification rules.
9. **Touching the money.** If sale cash comes to you, the exchange can fail. Let the QI hold it.
10. **Forgetting state filings.** California's FTB 3840 is an annual filing for out-of-state exchanges, and other states have their own rules.
11. **Skipping your CPA and attorney.** A DST is a tax decision and a legal decision as much as an investment one.

My [guide to choosing a DST](/writing/how-to-choose-a-delaware-statutory-trust-dst) goes further on how to compare offerings side by side.

## How I review a DST before I'll offer it

[My background](/about) is in applied mathematics and applied statistics, which I studied at Babson College. I spent years in real estate acquisitions, management and development at firms including ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners and Arbor Bay Capital Partners. I have been involved in more than $10 billion of real estate investment activity. That experience shapes how I read a PPM.

I offer DSTs from more than 20 institutional sponsors, and I do not have a proprietary product. So I do not have to like anything. My due diligence covers five areas, and I partner with outside auditors in each one:

1. **Broker-dealer review.** How the offering has been vetted on the securities side.
2. **Investment manager audit.** The sponsor's track record through a full cycle, including deals that went badly and what they did about it.
3. **Investment offering review.** The PPM, the fee table, the trust agreement and the conflicts of interest.
4. **Real estate assessment.** The lease, the tenant, rent compared with the market, and physical condition compared with the reserve.
5. **Institutional underwriting.** Stress-testing the numbers the way an institutional buyer would, including the loan maturity and cash management triggers.

This review is continuous, not a one-time check. I also track more than 1,100 full-cycle 1031 DST investments for performance. Full-cycle means the property was bought, held and sold, so we can see what really happened, not just what was projected.

The last thing I weigh is what you are giving up: liquidity, control and the flexibility of your next exchange. That is easy to forget on day 30 of a 45-day window. It is the one I would ask you to take most seriously.

## What are the risks of a DST?

DST interests are speculative, illiquid securities. Before investing, read the full PPM, including its risk factors. These are the main risks, and my guide to [DST risks](/learn/dst-risks) covers each in more depth.

- **Loss of principal.** The property can lose value. With debt, you can lose some or all of your investment.
- **Distributions are not guaranteed.** They depend on the property's income and can be reduced or suspended, including by lender cash management rules.
- **Illiquidity.** There is no public market and no redemption feature, and transfer usually needs sponsor consent. Plan to hold for the full term, which can run longer than projected.
- **Limited control.** Investors have no say in day-to-day management and usually no vote on sale timing, leasing or financing.
- **Reliance on the sponsor.** Sponsor affiliates usually act as signatory trustee, manager and master tenant. Their judgment, finances and conflicts of interest directly affect your investment.
- **A rigid structure.** The trust cannot raise capital, refinance or re-lease. A springing LLC conversion may be needed, which can end future 1031 eligibility for your interest.
- **Leverage.** Debt magnifies losses as well as gains, and a loan maturity can force a sale at a bad time.
- **Fees and load.** Up-front and ongoing fees reduce the amount invested in real estate and your returns.
- **Concentration.** A single-asset or single-tenant DST puts your outcome on one building or one tenant. FINRA's Notice 05-18 told firms to weigh the risk of over-concentration against the tax benefits.
- **Tax risk.** If the trust fails to follow Rev. Rul. 2004-86, or your exchange is not completed properly, you could owe tax on the deferred gain. Tax laws, including Section 1031 and the step-up in basis, can change.
- **Fraud risk.** The SEC's private placement bulletin notes that a Form D filing "does not represent SEC approval or registration." Work with a registered representative, and look them up on FINRA BrokerCheck.

Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

## What my data shows

I keep detailed records on every offering that reaches my desk. Here is what [my offering records](/data/dst-offerings) as of October 2026 show, across 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They are not a forecast or a promise about any future offering.

### Nearly half of DSTs use no debt

The number I share most often is this one: **36 of 76 offerings (47%) are all-cash, with no loan at all.** Another 16 offerings (21%) have loan-to-value above 50%. Among the offerings that do use debt, the median LTV is about 49%.

That spread matters for the worked example above. If you need to replace a mortgage, the leveraged half of the market is where you look. If you want to avoid loan risk, you have plenty of all-cash options, but you may need extra cash or a mix to replace your debt.

| Leverage | Offerings | Share |
|---|---|---|
| All-cash (no debt) | 36 | 47% |
| Leveraged, LTV 50% or below | 24 | 32% |
| Leveraged, LTV above 50% | 16 | 21% |

### Minimums are lower than many people expect

| Measure | Value |
|---|---|
| Median minimum investment | $100,000 |
| Range of minimums | $25,000 to $500,000 |
| Offerings starting at $25,000 | 21 (28%) |

Lower minimums make it easier to split an exchange across several DSTs. That can spread risk across properties, sponsors and regions.

### Property types

| Property type | Offerings | Share |
|---|---|---|
| Multifamily (apartments) | 31 | 41% |
| Industrial | 18 | 24% |
| Net lease (including energy royalty programs) | 15 | 20% |
| Self-storage | 5 | 7% |
| Retail | 4 | 5% |
| Medical office | 3 | 4% |

Some net lease offerings are energy royalty programs that hold mineral and royalty interests in oil and gas. One portfolio holds 14 royalty properties with 27 producing wells in Oklahoma's Anadarko Basin and Texas's Permian Basin. Third-party operators run the wells. The owner receives a share of production revenue and does not pay drilling or operating costs. Royalty income rises and falls with energy prices and production, so these carry their own risks.

### Distributions, exits and hold periods

Among the 71 offerings that published a projected year-one distribution rate, the median was 4.7%, with a range of 4.0% to 9.0%. These are projections. They are not guaranteed, and actual results can differ a lot.

On exits, 44 offerings (58%) offer an optional 721 exit into a REIT, 13 (17%) make it mandatory, 17 (22%) offer none, and 2 are unclear. If you want to keep doing 1031 exchanges for life, a mandatory 721 exit may not suit you.

A projected hold of 10 years is the most common, at 31 offerings. Others project 5 to 10 years or 7 years, and a few are 2-year programs. The median offering is about $65 million of total capitalization. The properties sit in 33 states, most often Florida (14), Texas (13), North Carolina (8) and Georgia (7).

### Where the offerings stand

Of the 76 offerings, 16 are open, 6 have limited availability, 24 are under review, 25 are closed, and 5 are ones I reviewed and passed on. I include those five for a reason. Saying no is part of the job. You can see [the offerings currently available](/invest) once you are ready to look at specifics. My guide to [DST properties for sale](/learn/dst-properties-for-sale) explains how listings and status labels work.

## Frequently asked questions

### Is a DST a security or real estate?

Both. For securities law, a DST interest is a security, usually sold privately under Regulation D to accredited investors through a broker-dealer. For federal income tax, Revenue Ruling 2004-86 treats a properly structured DST as a grantor trust, so you are treated as owning a share of the real estate itself.

### What is the minimum investment in a DST?

It varies by offering. In my offering records as of October 2026, the median minimum is $100,000, and 28% of offerings start at $25,000. What matters more is whether the offering lets you place all your exchange cash and replace your debt.

### Can I lose money in a DST?

Yes. You can lose part or all of your investment if property values fall, tenants leave or expenses rise, and debt magnifies those losses. Distributions can also be reduced or stopped.

### How long do DSTs usually last?

There is no fixed term. In my records, a projected 10-year hold is the most common, though some project 5 to 7 years. The sponsor decides when to sell, and holds can run longer than projected.

### Can I do another 1031 exchange when my DST sells?

Usually, yes. Because you are treated as owning your share of the real estate, you can roll your share of the sale proceeds into a new 1031 exchange, as long as a qualified intermediary is in place before the sale closes. The big exceptions are a springing LLC conversion or a 721 exchange into a REIT.

### Do DST investors get a K-1?

Generally, no. A DST structured under Rev. Rul. 2004-86 is a grantor trust, so you receive an annual statement of your share of income, expenses and depreciation instead. If the trust converts to a springing LLC, it is generally taxed as a partnership, and you would start receiving K-1s.

### Can I use a DST for only part of my exchange?

Yes. Many investors buy one property directly and put the rest into one or more DSTs, or use a DST to absorb leftover cash that would otherwise be taxable boot. Each DST must be identified within 45 days and closed within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first, and the total has to meet your value and debt targets.

### How fast can a DST close?

Because the trust already owns its property, closing can often take two to three business days once paperwork, funding and approvals are complete. That speed makes DSTs useful as backups when a direct purchase falls through. Offerings can fill up, though, so speed is never certain.

### Do I get depreciation from a DST?

Generally, yes. As a grantor trust owner, you are treated as owning your share of the property, so your share of depreciation flows to you. Your CPA will figure the amount based on the basis that carried over from your old property.

### Is a DST the same as a REIT?

No. A REIT is a company, and its shares are stock, which cannot be 1031 replacement property. A DST interest is treated as direct real estate ownership for tax purposes, and the two connect only through a 721 exchange.

### What happens if the sponsor runs into trouble?

The trust owns the property, not the sponsor, so a sponsor's failure does not automatically wipe out your interest. But sponsor affiliates usually manage the property and act as master tenant, so trouble at the sponsor can hurt operations and distributions. Review the sponsor's finances and track record before you invest.

This guide is for education only. It is not tax, legal or investment advice. Please confirm every decision with your CPA, attorney and qualified intermediary. DST interests are offered only by private placement memorandum to qualified investors.

## Sources

- [Internal Revenue Service, Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf)
- [Internal Revenue Service, Revenue Procedure 2002-22](https://www.irs.gov/pub/irs-drop/rp-02-22.pdf)
- [Internal Revenue Service, Revenue Procedure 2025-32 (2026 inflation adjustments)](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf)
- [26 U.S.C. § 1031, Cornell Law School Legal Information Institute](https://www.law.cornell.edu/uscode/text/26/1031)
- [26 U.S.C. § 721, Cornell Law School Legal Information Institute](https://www.law.cornell.edu/uscode/text/26/721)
- [26 U.S.C. § 1014, Cornell Law School Legal Information Institute](https://www.law.cornell.edu/uscode/text/26/1014)
- [26 U.S.C. § 1411, Net investment income tax, Cornell Law School Legal Information Institute](https://www.law.cornell.edu/uscode/text/26/1411)
- [26 CFR § 301.7701-4, Trusts](https://www.law.cornell.edu/cfr/text/26/301.7701-4)
- [26 CFR § 1.1031(k)-1, Treatment of deferred exchanges](https://www.law.cornell.edu/cfr/text/26/1.1031(k)-1)
- [IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Code Section 1031](https://www.irs.gov/pub/irs-news/fs-08-18.pdf)
- [IRS, About Form 8824, Like-Kind Exchanges](https://www.irs.gov/forms-pubs/about-form-8824)
- [IRS Publication 544, Sales and Other Dispositions of Assets](https://www.irs.gov/publications/p544)
- [IRS Topic No. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409)
- [Delaware Code, Title 12, Chapter 38, Subchapter I (Domestic Statutory Trusts)](https://delcode.delaware.gov/title12/c038/sc01/index.html)
- [FINRA (NASD) Notice to Members 05-18](https://www.finra.org/rules-guidance/notices/05-18)
- [Investor.gov, Updated Investor Bulletin: Accredited Investors](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3)
- [Investor.gov, Private Placements under Regulation D, Investor Bulletin](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/private)
- [California Franchise Tax Board, 2025 Instructions for Form FTB 3840](https://www.ftb.ca.gov/forms/2025/2025-3840-instructions.html)
- [HCO, California Income Tax Rates, Refunds and Payment](https://www.hco.com/insights/california-income-tax-rates-refunds-payment)
- [RSM, Restored Bonus Depreciation: IRS Interim Guidance on OBBBA Rules](https://rsmus.com/insights/tax-alerts/2026/restored-bonus-depreciation-irs-interim-guidance-obbba-rules.html)

---

Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments, LLC is independent of Aurora Securities, Inc. and is not a registered broker-dealer or investment adviser. This content is general education, not investment, tax, or legal advice, and is not an offer to buy or sell securities. Offers are made only through the offering documents to eligible investors, generally accredited investors. DST interests are illiquid, distributions are not guaranteed, and you can lose your entire investment.

Contact: Jerry Baker, Baker 1031 Investments · hello@baker1031.com · (415) 965-0552 · https://baker1031.com/contact