How Do Delaware Statutory Trusts Work? Roles, Rules and Leases

Key takeaways

• The trust owns the property and signs the loan. You own a beneficial interest, which is a share of the trust, not a deed.
• A DST can work in a 1031 exchange only because the IRS treats a properly built one as a passive "investment trust." The trustee can't change what investors own.
• That is where the "seven deadly sins" come from. The trustee can't raise new money, change the loan or lease, reinvest sale proceeds or make major changes to the building.
• Sponsors work around those limits with three tools: reserves raised at the start, a master lease, and a "springing LLC" clause. Each one adds flexibility and its own risk.
• The name on your sale and the name on your DST purchase generally have to be the same taxpayer. A single-member LLC or a revocable living trust usually counts as you; a multi-member LLC usually doesn't.
• DST interests are illiquid securities. Distributions are not guaranteed, you have little control, most offerings are for accredited investors only, and you can lose your entire investment.

How do Delaware statutory trusts work, in one picture?

Let me start with the whole machine. Then I'll take it apart one piece at a time.

A Delaware Statutory Trust, or DST, is a trust formed under Delaware law to hold property for its owners. A sponsor is the real estate company that puts the deal together. It finds the building, arranges any loan, writes the offering document and runs the property after closing.

Here is how the pieces fit, in plain order:

1. The sponsor buys a property, often with a short-term loan, and puts it into a new DST.
2. The DST sells shares of itself, called beneficial interests, to investors.
3. Investors' money pays off the sponsor's short-term funding. Now the investors own the trust.
4. The trust either leases the whole building to one company (a master lease) or collects rent from tenants directly.
5. Rent pays the loan, the costs and the fees. What's left may be paid out to investors.
6. Years later, the sponsor sells the property. The trust pays off any loan and sends the rest to investors.

Most people buy a DST interest as part of a 1031 exchange. That's the tax rule that 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. It comes from Section 1031 of the Internal Revenue Code, which applies only to real property.

If you want the full overview first, including fees, exits, taxes and who DSTs fit, start with my complete DST guide. This guide goes one level deeper into the engine room. It covers what you own, who makes the decisions, why the IRS allows it, and the rules that keep it all working.

What is a beneficial interest in a DST?

A beneficial interest is your ownership share of the trust. If you put in $500,000 and investors put in $10 million in total, you own a 5% beneficial interest. Your share of income, expenses, depreciation and sale proceeds is 5%.

You don't get a deed. The trust holds the deed. You hold a share of the trust.

Under Delaware law, it's personal property

This surprises people. Delaware's statutory trust law, in Title 12, Chapter 38 of the Delaware Code, says "A beneficial owner's beneficial interest in the statutory trust is personal property." It also says that, unless the trust's governing document says otherwise, a beneficial owner has no interest in any specific trust property.

So under state law, you own a share of a trust, not a piece of a building. You can't walk into Unit 214 and claim it as yours.

Under federal tax law, it can be treated as real estate

For federal income tax, the answer flips. A properly structured DST is treated as a grantor trust. That's a trust whose owners are treated as owning its assets directly for income tax purposes. I'll explain why in the Revenue Ruling section below.

The practical result is that your DST interest can count as real property for a 1031 exchange. Both statements are true at once. Most confusion about DSTs comes from holding only one of them in mind.

It's also a security

A DST interest is sold as a security. You buy it through a broker-dealer, which is a firm registered to sell securities. The sale is made under a private placement memorandum (PPM). That's the legal document that describes the property, the loan, the fees, the conflicts of interest and the risks.

Most offerings are sold only to accredited investors. I cover the income and net worth tests in my accredited investor guide.

What your interest gives you, and what it doesn't

Your beneficial interest usually gives you:

• A pro rata share of any cash the trust distributes. Pro rata means in proportion to your ownership.
• A pro rata share of sale proceeds when the property sells.
• A pro rata share of the trust's income, expenses and depreciation for your tax return.
• Limited personal liability. Delaware law says beneficial owners get "the same limitation of personal liability" that stockholders of a Delaware corporation get, subject to the trust agreement.
• Regular reports from the sponsor.

It usually doesn't give you:

• A vote on leasing, financing, repairs or the sale date.
• The right to cash out early. There's no redemption feature and no public market.
• The right to sell or give away your interest without the sponsor's consent. Most trust agreements require it.
• The right to add more money later. The trust can't accept it.

Limited liability protects your other assets from the trust's debts. It doesn't protect the money you put in. You can still lose all of it.

Who runs a DST, and who decides what?

A DST has more parties than most people expect. In most deals, several of them are affiliates of the sponsor. An affiliate is a company under common control with the sponsor.

The Delaware trustee

Delaware law says "Every statutory trust shall at all times have at least 1 trustee" that is a Delaware resident or has its principal place of business there. So every DST hires a Delaware trust company to fill that seat. Its duties are usually administrative. It isn't the one making business decisions.

The signatory trustee

The signatory trustee, sometimes called the managing trustee, is usually a sponsor affiliate. It signs documents for the trust and makes the narrow decisions the trust agreement allows. The trust agreement is the governing document, and it spells out exactly what the trustee may and may not do.

The manager or asset manager

The manager oversees the property, deals with the lender, prepares reports and sends distributions. It's usually a sponsor affiliate, and it usually earns an asset management fee.

The master tenant

If the DST uses a master lease, the master tenant leases the entire property from the trust. It's usually a sponsor affiliate too. I explain how that works in detail below.

The property manager

The property manager handles daily operations: leasing units, collecting rent, fixing things, handling tenants. It may be a sponsor affiliate or an outside firm.

The lender

If the DST has a loan, the lender holds a mortgage on the property. The trust is the borrower. DST loans are typically non-recourse to investors, but check each PPM. Non-recourse means the lender can take the property if the loan defaults but generally can't come after your personal assets.

Who decides what

Here's the part that matters most to you as an owner. One row mentions a REIT, or real estate investment trust, which is a company that owns many properties. Some DSTs let a REIT's operating partnership, the partnership through which a REIT owns its properties, buy the trust's property later. That's called a 721 exchange, a tax-deferred trade of property for partnership units.

Read that table twice. A DST gives you a share of the results. It doesn't give you the steering wheel.

Because sponsor affiliates fill so many roles, the sponsor's strength and honesty matter as much as the building. I wrote a separate guide on what happens if a DST sponsor goes bankrupt, because every investor should think it through before they buy.

How does Rev. Rul. 2004-86 let a DST work in a 1031 exchange?

Everything in this guide traces back to one IRS document. In 2004, the IRS issued Revenue Ruling 2004-86. A revenue ruling is the IRS's official view of how the tax law applies to a specific set of facts.

The facts the IRS looked at

The ruling describes a simple setup. One person bought a rental property with a 10-year non-recourse loan. The property was leased to one tenant under a 10-year net lease. A net lease is one where the tenant pays the taxes, insurance, maintenance and utilities on top of rent.

That person then put the property into a Delaware statutory trust. Two other people exchanged their own properties for all of the interests in the trust. They used a qualified intermediary, or QI. That's the company that holds sale proceeds during a 1031 exchange so the seller never touches them.

The trust agreement put tight limits on the trustee. The ruling says "the trustee's activities are limited to the collection and distribution of income." The trust was set to end after 10 years or when the property was sold, whichever came first.

The IRS's three key conclusions

1. The DST was an "investment trust." Under the Treasury rule in 26 CFR 301.7701-4(c), an investment trust "will not be classified as a trust if there is a power under the trust agreement" to "vary the investment of the certificate holders." This trustee had no such power. So the trust stayed a trust for tax purposes.
2. The investors were treated as owners of the property. The ruling treats the investors as grantors under the Treasury regulations. It also treats them as owners under Section 677 of the tax code. Each was treated "as the owner of an aliquot portion of the trust." Aliquot portion means a fractional share. So each investor was treated as owning an undivided fractional interest in the building.
3. The exchange qualified. The ruling holds that "A taxpayer may exchange real property for an interest in the Delaware statutory trust described above" without recognizing gain or loss under Section 1031, "if the other requirements of § 1031 are satisfied."

Why the "power to vary" is the whole game

Here's why conclusion one carries everything else.

If a trustee could buy and sell properties, raise new money or reshape the deal, the trust would look like a business. A business with several owners is usually taxed as a partnership. A partnership interest isn't real property. And Section 1031 only covers real property.

So a DST that acts like a business loses the very tax treatment that made it useful. That's why the trust has to stay passive for its whole life. Every restriction in the next section exists to protect that one conclusion.

What the ruling doesn't say

A few things people credit to the ruling aren't in it. It doesn't use the phrase "seven deadly sins." It doesn't mention master leases. It doesn't mention springing LLCs. Those are industry practices built on top of the ruling's facts.

That matters. A sponsor's tax counsel decides how closely a given trust tracks the ruling. Each PPM should include a tax opinion or a tax section explaining that view. Your CPA should read it.

What are the DST "seven deadly sins"?

"Seven deadly sins" is industry shorthand for the trustee limits drawn from Rev. Rul. 2004-86. The ruling doesn't number them. People in the business boiled its facts down to seven rules.

For each one, I'll cover what it says, what it means for a real building, and how sponsors plan around it.

Sin 1: No new capital after the offering closes

The rule. The ruling says the trustee may not "accept additional contributions of assets (including money)" to the trust. Once the offering closes, no investor can add money, and no new investor can buy in from the trust.

What it means in practice. If the building needs $2 million it doesn't have, the trust can't ask investors for it. There are no capital calls in a DST. A capital call is a request for more money from owners.

How sponsors plan for it. They raise a reserve up front, out of the offering proceeds. Compare the reserve with the property condition report, which is the engineer's report on the building's physical condition. A reserve that looks generous as a round number can still be thin for an older building.

Sin 2: No changing the loan

The rule. The ruling says the trustee "may not renegotiate the terms of the debt" used to buy the property. Trust agreements in practice also bar the trustee from taking on new debt. That isn't spelled out in the ruling's text, but it follows from the same idea.

What it means in practice. The trust can't refinance, even if rates drop. It can't extend a loan unless the extension was already in the loan documents. It can't borrow to fix a roof.

How sponsors plan for it. They match the loan term to the planned hold. If a DST has a 10-year fixed-rate loan, the sponsor plans to sell before year 10. They may also build in extension options at the start. My guide to DST debt and leverage covers loan terms in depth.

Sin 3: No reinvesting sale proceeds

The rule. The trustee may not "exchange Blackacre for other property." The ruling explains that because the trust ends when the property is sold, "no reinvestment of such monies is possible."

What it means in practice. A DST can't sell one building and buy another. When the property sells, the cash goes out to investors.

How sponsors plan for it. They don't. This is the point of the structure. Each investor decides what to do with their share. That's actually a benefit, because you can do your own 1031 exchange with your share of the proceeds.

Sin 4: Only minor, non-structural changes to the property

The rule. The ruling says the trustee "may make only minor non-structural modifications" to the property, "unless otherwise required by law."

What it means in practice. Normal repairs and upkeep are fine. A new parking lot, an added building or a big repositioning project generally isn't. A "value-add" plan, where an owner renovates to raise rents, is hard to do inside a plain DST.

How sponsors plan for it. In a master lease DST, the master tenant often handles routine work and some capital spending under the lease. Larger projects are usually done before the property goes into the trust. If something major comes up later, the springing LLC is the fallback.

Sin 5: Cash between distributions sits in short-term holdings only

The rule. Between distributions, cash may be held only in short-term U.S. government obligations or in bank certificates of deposit. The ruling says "the trustee may only invest in short-term obligations that mature prior to the next distribution date."

What it means in practice. The trust can't invest idle cash in stocks, funds or other real estate. It can't try to earn more on its reserves.

How sponsors plan for it. Not much planning is needed. It just means reserves earn a modest return at most.

Sin 6: All available cash must be paid out

The rule. In the ruling's facts, "the trustee is required to distribute all available cash less reserves quarterly to each beneficial owner." The trustee may keep "a reasonable reserve for expenses."

What it means in practice. The trust can't hoard cash for a future project. Whatever is left after costs and reserves goes out. Many DSTs today pay distributions monthly rather than quarterly.

How sponsors plan for it. They size reserves carefully at the start. Some loans also come with cash management rules. These are lender rules that hold back cash if income falls below a set test. That's a common reason distributions get cut in a leveraged DST, even when the loan isn't in default. Distributions are not guaranteed, and this is one reason why.

Sin 7: No new leases and no changes to existing ones

The rule. The ruling says the trustee "may not renegotiate the lease with Z or enter into leases with tenants other than Z, except in the case of Z's bankruptcy or insolvency." Z is the ruling's tenant.

What it means in practice. Think about what this does to an apartment building. Leases turn over every month. The trust itself can't sign any of them. The same goes for self-storage, which rents units every week.

How sponsors plan for it. This is exactly why the master lease exists. I cover it next.

The seven limits at a glance

Read the list from a property manager's chair and the tension is plain. Real buildings need things. A DST trades that flexibility for its tax treatment. Before you invest, you should know which workarounds your DST uses and what each one costs you.

How does a master lease DST work?

A master lease is one long-term lease of the entire property from the trust to a single company, the master tenant. The master tenant then signs, renews and renegotiates all the individual leases with the real tenants. Those individual leases are called subleases.

The trust has one lease, with one tenant, for the whole term. That keeps the trust inside the seventh limit. Meanwhile, the master tenant can do all the leasing a busy building needs.

Who the master tenant is

The master tenant is usually a single-purpose company owned by the sponsor. Single-purpose means it was formed only for this lease. It usually has limited capital of its own. Sometimes that capital is a cash deposit. Sometimes it's a promissory note from the sponsor, which is a written promise to pay.

The PPM explains how the master tenant is funded. Read that section slowly. A master lease is only as strong as the company behind it.

How master lease rent works

Master lease rent usually has two or three parts. The details vary by deal, but here's the common shape:

• Base rent. A fixed amount the master tenant pays the trust. It's usually sized to cover the trust's loan payments and the planned distributions.
• Additional rent. Sometimes called bonus or percentage rent. It's a share of the property's revenue above a set level, paid to the trust.
• What the master tenant keeps. After it pays operating costs, base rent and any additional rent, the master tenant keeps what's left. That's how the sponsor earns on operations.

A worked example: cash flowing through a master lease

This is a hypothetical example with simple, made-up numbers. It doesn't represent any offering.

Say a DST owns a 200-unit apartment community. The trust raised $30,000,000 from investors and has a $20,000,000 loan. The master lease sets base rent at $2,400,000 a year, plus additional rent of 40% of gross revenue above $6,000,000.

In a given year, the property collects $6,500,000 in rent from residents. The master tenant pays $2,900,000 in operating costs, like property taxes, insurance, payroll and repairs.

Here's how the money moves:

Now look at the trust's side:

That's $1,200,000 on $30,000,000 of investor equity, or 4% for the year in this example. If you owned a 1% beneficial interest, your share would be $12,000 before tax.

What happens in a bad year

Now say rents fall and operating costs rise. The property collects $5,000,000, and costs come to $3,000,000. The master tenant has $2,000,000 left. It still owes $2,400,000 in base rent.

The master tenant has to cover the $400,000 gap from its own capital. If its capital is thin, it may not be able to. At that point, the trust's income falls. The loan payments still have to be made. Distributions may be cut or stopped.

That's the honest picture of a master lease. It can smooth out small bumps. It isn't a promise of income. When a property struggles for long enough, the master tenant's cushion runs out.

The conflict of interest

The master tenant is usually owned by the sponsor. So the sponsor sits on both sides of the master lease. It set the base rent, it collects the upside above the trust's share, and it decides how hard to push on expenses.

That isn't wrong in itself. It is a conflict you should understand. Look at whether the base rent leaves the master tenant enough room to operate, and how the upside is split.

When a DST has no master lease

Single-tenant net lease DSTs often skip the master lease. If one company leases the whole building for 15 years and pays the taxes, insurance and upkeep, the trust can simply be the landlord. That matches the ruling's own facts closely. The trade-off is that everything rides on one tenant's credit and one lease term.

What is a springing LLC, and when does it spring?

A springing LLC is a clause in most DST trust agreements that lets the trust convert into a Delaware limited liability company (LLC) when it must do something the seven limits forbid. An LLC is a type of company that can own property and has broad powers to borrow, lease and spend.

It "springs" into existence only when a trigger occurs. Until then, it's just a paragraph in the trust agreement.

What can trigger a conversion

Triggers vary by deal. Common ones include:

• A loan coming due when the property can't be sold at a fair price.
• The need to refinance to avoid a default.
• A vacant single-tenant building that needs a new lease.
• A major repair or capital project the reserve can't cover.
• A need for new money from investors.

The common thread is a threat to the property's value that the trust can't handle under its limits.

How a conversion usually works

Here's the general sequence. The trust agreement controls the details for each DST.

1. The signatory trustee identifies the problem. It decides the trust can't protect the property within its limits.
2. Approvals are gathered. Some trust agreements let the signatory trustee convert on its own judgment. Others require an investor vote. Most loan documents require the lender's consent.
3. The trust transfers the property to a new LLC. Your beneficial interest becomes an LLC membership interest of the same proportion.
4. The LLC acts. Now it can refinance, re-lease, spend or raise money as needed, usually under the same sponsor affiliate as manager.

The tax consequences

The conversion is generally designed so it isn't a taxable event by itself. Your deferred gain is meant to stay deferred. Your tax advisor should confirm how a specific conversion would affect you.

But here is the part people miss. An LLC with two or more members is, by default, taxed as a partnership. The Treasury regulation at 26 CFR 301.7701-3 says a domestic eligible entity is "A partnership if it has two or more members," unless it elects otherwise.

A partnership interest isn't real property. So when the LLC later sells, you generally can't do your own 1031 exchange with your share the way you could from a DST interest. If the LLC itself does an exchange, that's the LLC's decision, not yours. You'd also start receiving a Schedule K-1 each year instead of the simpler grantor trust statement. A Schedule K-1 is the tax form a partnership sends each partner.

For someone planning to keep exchanging for decades, a conversion can end that plan.

A hypothetical springing LLC scenario

This is a made-up example. It doesn't describe any real offering.

Say a DST owns a single-tenant distribution building. The tenant's 12-year lease ends in year 8 of the trust, and the tenant leaves. The building is empty. The loan matures in two years.

The trust can't sign a lease with a new tenant. It can't refinance. Selling an empty building would mean a deep loss. So the signatory trustee triggers the springing LLC, with the lender's consent.

The LLC signs a new tenant, spends reserve money and borrowed funds on improvements, and refinances the loan. The property may be worth more than an empty building would have been. But each investor now owns an LLC interest that is generally taxed as a partnership. When it sells, investors may owe tax on their deferred gain unless the LLC itself completes an exchange.

What to ask before you invest

• What exactly triggers a conversion?
• Who decides: the signatory trustee alone, an investor vote, or both?
• Does the lender have to consent?
• Who would manage the LLC, and what fees would it charge?
• Has this sponsor ever converted a DST? What happened?

How does a DST work from start to finish, step by step?

Here's the full life cycle of a typical DST, from the sponsor's first move to the final check. The exact order and timing vary by deal.

Step 1: The sponsor buys and prepares the property

The sponsor finds a property, negotiates the price and closes on it. It usually uses its own funds or a short-term loan to do that. Any big renovations usually happen before the property goes into the trust, because the trust can't do them later.

Step 2: The sponsor forms the trust and puts long-term debt in place

The sponsor files a certificate of trust in Delaware and signs the trust agreement. If the DST will use debt, the long-term loan is placed now. The loan terms are fixed for the life of the trust.

Step 3: The master lease is signed, if there is one

For multi-tenant property, the trust signs a master lease with the sponsor's master tenant company.

Step 4: The offering opens

The sponsor issues the PPM. Broker-dealers review the offering before they make it available to clients. Investors read the PPM and decide whether to buy.

Step 5: Investors subscribe

You sign a subscription agreement and an investor questionnaire. The broker-dealer reviews whether the investment suits you. If you're doing a 1031 exchange, your QI sends your exchange funds straight to the trust.

Because the trust already owns the property, closing on your interest can often take two to three business days once paperwork, funding and approvals are complete.

Step 6: The offering closes

Once the sponsor sells all the interests, or decides to stop, the offering closes. From this point on, no new money can come in. The sponsor's short-term funding has been paid back with investor money.

Step 7: The trust operates

The master tenant or property manager runs the property. The trust collects rent, pays the loan and costs, keeps a reserve and distributes what's left. Distributions are not guaranteed.

Step 8: You get reports and a yearly tax statement

You'll get periodic updates from the sponsor. Each year, you'll get a statement showing your share of income, expenses, interest and depreciation. Because the DST is a grantor trust, it generally doesn't send a K-1. My guide to DST tax reporting and depreciation walks through what to expect at tax time.

Step 9: The sponsor decides when to sell

The sponsor decides when to sell, guided by the projected hold in the PPM and by the market. In some DSTs, a sale to a REIT through a 721 exchange is also possible. My 721 exchange guide explains that path.

Step 10: The trust sells, pays off the loan and distributes proceeds

The buyer pays the trust. The loan is paid off. Any disposition fee or profit share owed to the sponsor comes out. A disposition fee is a fee the sponsor earns when the property sells. The rest goes to investors pro rata.

Step 11: You choose your next move

You can do a new 1031 exchange with your share, as long as your QI is lined up before the sale closes. You can take the cash and pay the tax. Or, if you've held the interest until death, your heirs may get a stepped-up basis under current law. That means the heir's tax basis resets to the value at death, which can eliminate the deferred gain for them. I cover those choices in my guide to the DST full cycle and exit.

What is the same-taxpayer rule, and how does it apply to DSTs?

The same-taxpayer rule is a practical rule of 1031 exchanges. The taxpayer who sells the old property should be the same taxpayer who buys the new one. The tax code doesn't use that name, but the idea follows from how Section 1031 works. It's one taxpayer exchanging its own property for other property.

Why it matters with DSTs

DSTs are often bought by people who owned their old property in an entity, like an LLC or a trust. So the question comes up a lot. Whose name goes on the DST subscription?

The general answer: the same taxpayer, for tax purposes, that sold the old property. The legal name can sometimes differ, as long as the tax owner is the same.

Disregarded entities count as you

A disregarded entity is a business that the IRS ignores for income tax purposes. Its income and property are treated as yours.

The most common example is a single-member LLC. The IRS says on its single-member LLC page that "an LLC with only one member is treated as an entity disregarded as separate from its owner" for income tax purposes, unless it elects to be taxed as a corporation. The Treasury regulation says the same, by default, for a domestic entity that is "Disregarded as an entity separate from its owner if it has a single owner."

So if your single-member LLC sells a rental, you can often buy the DST interest in your own name, or the reverse. To the IRS, it's the same taxpayer.

Revocable living trusts usually count as you

A revocable living trust is one you can change or cancel during your life. It's a grantor trust. Under Section 676 of the tax code, "The grantor shall be treated as the owner of any portion of a trust" when the grantor has the power to take it back. So a sale by your revocable trust and a DST purchase in your own name, or the reverse, is generally treated as one taxpayer.

Multi-member LLCs and partnerships don't count as you

An LLC with two or more members is, by default, taxed as a partnership. The partnership is its own taxpayer. If the partnership sells, the partnership has to buy the replacement property. The individual members can't each buy their own DST interest with the partnership's sale money under the partnership's exchange.

This is a common structural problem. Three siblings own a building through an LLC. One wants cash, one wants a DST, and one wants to buy a duplex. That has to be sorted out well before the sale. It usually means restructuring with help from a tax attorney. Restructuring right before a sale carries its own risks, so start early.

Married couples

Spouses are a gray area. Filing a joint return doesn't automatically let one spouse buy for the other. The cleanest approach is to match title. If the old property was in both names, the DST interest usually should be too. If it was in one spouse's name, ask your CPA before changing that.

A quick reference

This table is general. Your specific facts can change the answer. Confirm with your CPA, attorney and QI before you sign anything.

Can you hold a DST in an LLC or trust?

Often, yes. Whether you should depends on why you want to, and whether it keeps the same-taxpayer rule intact.

Holding through a single-member LLC

Some investors want an LLC between them and their investments for privacy or estate planning. A single-member LLC can usually subscribe to a DST. It must meet the offering's investor rules. Because it's disregarded, it usually doesn't change your 1031 treatment.

Keep in mind that the DST already gives you limited liability under Delaware law. The extra LLC layer may not add much protection, so ask your attorney. It does add paperwork and sometimes state fees.

Holding through a revocable living trust

This is very common, and it's usually simple. Many investors hold their DST interests in a revocable living trust so the interest passes under their estate plan without probate. Because it's a grantor trust, it's generally treated as you for income tax.

If you buy in your own name, you can often move the interest into your revocable trust later. Most trust agreements still require sponsor consent for that transfer. Ask before you assume.

Holding through an irrevocable trust

An irrevocable trust may or may not be a grantor trust, depending on how it's drafted. If it isn't a grantor trust, it's its own taxpayer. It can buy a DST with its own exchange money, but not with yours. Your estate attorney should weigh in here.

Holding through a multi-member LLC

A partnership can buy a DST interest with its own exchange proceeds. The partnership then owns the interest, and the partners own the partnership. When the DST sells, the partnership decides what to do, not each partner.

Accredited status follows the buyer

Whoever signs the subscription has to qualify. If an entity is the buyer, it has to meet the offering's investor rules for entities. Those are different from the tests for individuals. Check with the broker-dealer early, because this can slow down a closing near day 180.

A worked example: following one investor through a DST

This is a hypothetical example with round numbers. It doesn't represent any offering or any client. It isn't tax advice, and your CPA should run your real figures.

The setup

Say Maria owns a rental house in her revocable living trust. She sells it for $1,200,000. After selling costs of $60,000, her net sale price is $1,140,000. She has no loan, so all $1,140,000 goes to her QI.

She wants to defer all her gain. So she needs to buy at least $1,140,000 of replacement property and reinvest all the cash.

The DST

A DST is buying a $50,000,000 industrial building with a $20,000,000 loan. That's a 40% loan-to-value, or LTV. LTV is the loan divided by the property's value. Investors put in $30,000,000.

Maria puts in her full $1,140,000. Her beneficial interest is $1,140,000 ÷ $30,000,000 = 3.8%.

What she's treated as owning

For tax purposes, Maria is treated as owning 3.8% of the building and owing 3.8% of the loan:

• Her share of the property: 3.8% × $50,000,000 = $1,900,000
• Her share of the loan: 3.8% × $20,000,000 = $760,000

Her share of value is more than her $1,140,000 net sale price. She reinvested all her cash. So her exchange is on track to defer all her gain, assuming the other rules are met.

Notice something. Maria had no debt on her old house, but now she's treated as owning a share of a leveraged building. That means her results will swing more with the property's value. Debt cuts both ways.

Her name on the subscription

Her old house was sold by her revocable trust. She can buy the DST interest in the trust's name or her own name, because both are the same taxpayer for income tax. She chooses the trust, so it follows her estate plan.

A year of operations

Say the trust has $1,500,000 available to distribute in year one. Maria's 3.8% share is $57,000. In a weaker year, that number could fall, or distributions could stop. They are not guaranteed.

Her annual statement shows her 3.8% share of rent, expenses, interest and depreciation. Her CPA reports it on her tax return.

The sale

In year eight, the trust sells the building for $56,000,000. It pays off the $20,000,000 loan. Say selling costs and the sponsor's disposition fee total $2,000,000. That leaves $34,000,000 for investors.

Maria's share is 3.8% × $34,000,000 = $1,292,000.

Now flip the case. If the building sold for $44,000,000, investors would get $44,000,000 − $20,000,000 − $2,000,000 = $22,000,000. Maria's share would be $836,000. That's less than she put in. If values fell far enough, she could lose all of it.

Either way, she can do another 1031 exchange with her share, as long as her QI is in place before the sale closes.

DST trust vs. other kinds of trusts and entities

People search for "DST trust" because the word "trust" confuses things. The letters DST are also used for a deferred sales trust, which is a different arrangement and not a Delaware statutory trust. This guide covers only Delaware statutory trusts. A DST isn't a family trust, and it isn't a REIT, even though both have "trust" in their names. Here's how they compare.

The key point is this. A DST is a passive container built to pass the tax treatment of real estate through to its owners. A revocable trust is an estate planning tool that can hold a DST interest. A REIT is a company whose shares are stock. They solve different problems.

Mistakes to avoid

These are common structural mistakes. Most are easy to avoid if you plan early.

1. Buying in the wrong name. If a multi-member LLC sold the old property, a DST bought by one member individually doesn't complete the LLC's exchange. Sort out ownership before the sale.
2. Assuming the master lease means steady income. A master lease is only as strong as the master tenant's capital. Find out what's actually behind it.
3. Skipping the springing LLC clause. Learn what triggers it, who approves it and what it would do to your future exchanges.
4. Ignoring the reserve. Because the trust can't raise money later, the reserve is all there is. Compare it with the building's age and condition.
5. Missing the loan maturity. The trust can't refinance. If the loan comes due before the planned sale, ask what happens.
6. Treating "beneficial interest" as a deed. You can't sell, pledge or move your interest without following the trust agreement, which usually requires sponsor consent.
7. Expecting a vote. In most DSTs, you won't vote on leasing, financing or the sale date. If that bothers you, a DST may not be the right fit.
8. Planning on a K-1 or no K-1 without checking. A DST generally sends a grantor trust statement. A converted LLC sends a K-1. Ask what you'll receive and when.
9. Changing your estate plan without the sponsor. Moving an interest into a trust, or splitting it among heirs, usually needs sponsor consent. Ask before you assume.
10. Skipping your advisors. A DST is a tax decision and a legal decision as much as an investment one. Bring in your CPA, attorney and QI early.

How I look at DST structure before I offer one

My background is in applied mathematics and applied statistics, which I studied at Babson College. I worked in real estate acquisitions, management and development at ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners and Arbor Bay Capital Partners. I've been involved in more than $10 billion of real estate investment activity.

That background makes me read a trust agreement like a buyer. I want to know who holds the steering wheel, and what happens when the road gets rough.

My team and I review every DST across five areas, and we partner with outside auditors in each:

1. Broker-dealer review
2. Investment manager audit
3. Investment offering review
4. Real estate assessment
5. Institutional underwriting

Questions to ask about structure: How is the master tenant capitalized? What triggers the springing LLC, and who decides? Does the loan maturity leave room to sell in a weak market? How large is the reserve compared with the property condition report?

The review is continuous, not a one-time check. I offer DSTs from more than 20 institutional sponsors. 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.

When you're ready to look at specifics, you can see the offerings I currently have available. I'll tell you why I'm considering each one, what I like and where I have reservations. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

What my data shows

I keep records on every offering that reaches my desk. Here's what my offering records as of October 2026 show, across 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They aren't a forecast or a promise about any future offering.

Nearly half the offerings in my records have no loan to refinance

The number that matters most for how a DST works is this one: 36 of 76 offerings (47%) are all-cash, with no debt at all.

That ties straight back to the seven limits. A DST can't refinance or renegotiate its loan. In an all-cash DST, there's no loan to come due. One of the most common springing LLC triggers simply isn't there. That doesn't make an all-cash DST free of risk. The property can still lose value, and tenants can still leave.

On the other side, 16 offerings (21%) have loan-to-value above 50%. In those, the loan's maturity date and the lender's cash management rules (rules that hold back cash if income falls) shape a lot of what can happen.

Hold periods tell you how long the limits last

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 trust's limits apply for that whole time. Ten years is a long time to go without the ability to refinance or re-lease.

Property types in my records

As a general rule, apartment and self-storage DSTs rely on a master lease because leases turn over constantly, while single-tenant net lease DSTs often skip it. My records don't track which offerings use one.

Exits are part of the structure too

On exits, 44 offerings (58%) offer an optional 721 exit into a REIT, 13 (17%) make it mandatory, 17 (22%) have none, and 2 are unclear. A 721 exit is written into the trust's documents from the start. It's another structural term to read before you invest, because it shapes your choices at the end.

Frequently asked questions

How do Delaware statutory trusts work in simple terms?

A DST is a trust that owns real estate. Investors buy shares of the trust, called beneficial interests, and a trustee runs it under strict limits. Rent pays the costs and any loan, and leftover cash may be paid to investors, though distributions are not guaranteed.

What are the seven deadly sins of a DST?

They're industry shorthand for the trustee limits drawn from IRS Revenue Ruling 2004-86. The trustee can't accept new capital, renegotiate the loan, reinvest sale proceeds, make more than minor non-structural changes, hold cash in anything but short-term government debt or CDs, keep cash instead of distributing it, or sign new leases. The ruling itself doesn't number them or use that name.

What is a master lease in a DST?

A master lease is one long-term lease of the whole property from the trust to a single master tenant, usually a sponsor affiliate. The master tenant then handles all the individual leases. It lets a DST own apartments or self-storage without the trust signing new leases, but it's only as strong as the master tenant's finances.

What is a springing LLC?

It's a clause in most DST trust agreements that lets the trust convert into an LLC when it must do something its limits forbid, like refinance or re-lease. The LLC has broader powers. But an LLC with several members is generally taxed as a partnership, which can end your ability to do your own 1031 exchange when it sells.

Who actually owns the property in a DST?

The trust holds legal title. You own a beneficial interest in the trust, which Delaware law treats as personal property. For federal income tax, a properly structured DST is a grantor trust, so you're treated as owning a fractional share of the real estate.

Who is the trustee of a DST?

Most DSTs have a Delaware trustee, which meets the state requirement and handles administrative duties. They also have a signatory trustee, usually a sponsor affiliate, that signs documents and makes the narrow decisions the trust agreement allows. Investors don't serve as trustees.

Can I put a DST in my LLC or living trust?

Often, yes. A single-member LLC and a revocable living trust are generally treated as you for income tax, so they usually don't break the same-taxpayer rule. Most trust agreements require sponsor consent to transfer an interest, so ask first and confirm with your CPA and attorney.

What is the same-taxpayer rule for a 1031 exchange?

It means the taxpayer that sells the old property should be the same taxpayer that buys the replacement property. Disregarded entities, like a single-member LLC, count as you. A multi-member LLC taxed as a partnership is its own taxpayer, so its members can't use its sale proceeds to buy their own DST interests under its exchange.

Do I get to vote on decisions in a DST?

Usually not on day-to-day matters like leasing, repairs or financing. Some trust agreements give investors a vote on major events, such as a springing LLC conversion. Read the trust agreement before you invest so you know exactly where your voice ends.

Why can't a DST just refinance its loan?

Because changing the loan would give the trustee a power to vary the investment. Under Rev. Rul. 2004-86 and the Treasury rules on investment trusts, that power could turn the trust into a business entity taxed as a partnership, which isn't 1031 replacement property. That's why loan terms are fixed before investors buy in.

Before you act

This guide is for education only. It isn't 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, most only to accredited investors. They're illiquid, distributions are not guaranteed, and you can lose your entire investment.

Sources

• Internal Revenue Service, Revenue Ruling 2004-86
• 26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 U.S.C. § 676, Power to revoke (Cornell LII)
• 26 U.S.C. § 677, Income for benefit of grantor (Cornell LII)
• 26 CFR § 301.7701-4, Trusts (Cornell LII)
• 26 CFR § 301.7701-3, Classification of certain business entities (Cornell LII)
• Delaware Code, Title 12, Chapter 38, Subchapter I (Domestic Statutory Trusts)
• IRS, Single Member Limited Liability Companies