INTRODUCTION TO DELAWARE STATUTORY TRUSTS (DSTs):
Delaware Statutory Trusts (DSTs) are a popular investment vehicle for real estate investors seeking passive income, diversification, and potential tax deferral. They provide access to institutional-grade properties—such as multifamily, office, retail, and industrial assets—without the responsibilities of direct ownership. Often used in 1031 exchanges, DSTs allow investors to reinvest proceeds while deferring capital gains taxes. Below is a closer look at how DSTs operate, their advantages, and important factors to consider before investing.
WHAT IS A DELAWARE STATUTORY TRUST (DST)?
A Delaware Statutory Trust is a legal entity created under Delaware law that allows multiple investors to pool their resources to invest in real estate properties. Each investor holds a fractional interest in the trust, which owns and manages the properties. DSTs are commonly used in 1031 exchanges, providing a turnkey solution for investors looking to defer capital gains taxes.
USING DSTs FOR YOUR 1031 EXCHANGE
Effective July 20, 2004, the IRS issued Revenue Ruling 2004-86, a pivotal decision that transformed the landscape of 1031 exchanges. This ruling allowed real estate investors to exchange their properties for undivided fractional interests in larger, institutional-grade properties held within a Delaware Statutory Trust (DST). For investors looking to defer capital gains taxes while gaining access to high-quality real estate, this development was groundbreaking. By classifying DSTs as fixed investment trusts, the IRS provided a structured and compliant vehicle for investors to execute tax-deferred exchanges under Section 1031.
The introduction of DSTs as a 1031 exchange option not only expanded investment opportunities but also removed many of the traditional burdens associated with property ownership. Instead of actively managing a rental property—handling maintenance, dealing with tenants, or overseeing day-to-day operations—investors could now passively own a fractional interest in professionally managed, income-producing properties. These DSTs often include high-value assets such as Class A multifamily apartment complexes, commercial office buildings, retail centers, industrial warehouses, and even medical facilities, all overseen by experienced asset managers.
The flexibility of DSTs allows investors to diversify their real estate holdings by placing their 1031 exchange proceeds into multiple DST properties, reducing risk through diversification. Additionally, because DSTs are structured to comply with IRS regulations, they provide a seamless way to execute a 1031 exchange without the complexities of direct property ownership. Investors no longer need to worry about sourcing a replacement property within the tight 45-day identification window or managing closing logistics—DSTs offer a turnkey solution that aligns with the tax-deferral benefits of a 1031 exchange.
For those seeking a hassle-free, tax-efficient way to reinvest real estate proceeds, DSTs present a compelling alternative. By combining the benefits of institutional-quality real estate with the advantages of passive ownership and tax deferment, DSTs have become a preferred strategy for investors looking to optimize their portfolios while maintaining compliance with IRS regulations.
KEY FEATURES OF DSTs
DSTs offer investors a unique and efficient way to own institutional-quality real estate without the burdens of active management. They provide fractional ownership, overseen by professional sponsors, that results in entirely passive ownership. Due to their compliance with Section 1031 rules, they have become a key replacement property vehicle for exchangers seeking a passive investment experience.
Fractional Ownership
One of the most appealing aspects of DSTs is fractional ownership. Investors purchase a proportional interest in the trust, allowing them to co-own institutional-quality real estate properties alongside other investors. This structure enables individuals to access high-value properties, such as commercial office buildings, apartment complexes, or retail centers, which may be financially out of reach for solo ownership.
Professional Management
DST properties are managed by experienced, professional sponsors with deep expertise in real estate acquisition, leasing, and maintenance. These sponsors handle the day-to-day operations of the property, including tenant management, rent collection, property maintenance, and regulatory compliance. This professional oversight ensures that properties are managed efficiently to maximize income and value for investors.
Limited Liability Protection
DST investors enjoy limited liability, meaning their financial exposure is restricted to the amount they invest in the trust. Investors are not personally responsible for the debts or obligations of the trust, providing a layer of protection for personal assets. This structure minimizes risk while allowing investors to benefit from real estate ownership.
Passive Investment Opportunity
DSTs are ideal for investors seeking passive income without the burden of active property management. Once invested, investors can sit back and enjoy potential income distributions without the stress of handling tenant issues, repairs, or administrative tasks. This hands-off investment structure is particularly appealing for those nearing retirement or looking to reduce the demands of managing a real estate portfolio.
PROPERTY TYPES IN A DST
DSTs may invest in all types of commercial real estate, including:
Multifamily / Residential
Multifamily properties, like apartment complexes, provide stable rental income and benefit from consistent housing demand. Amenities such as fitness centers and community spaces attract long-term tenants.
Self-Storage
Self-storage facilities offer stable returns, serving both residential and commercial users. They often feature climate control, secure access, and flexible rental options.
Office
Commercial office properties, from urban high-rises to suburban spaces, often feature long-term leases with corporate tenants. On-site amenities and tech infrastructure help retain tenants.
Retail
Retail centers, especially grocery-anchored or national chain properties, provide predictable income. They thrive on necessity-driven consumer traffic and long-term tenant leases.
Senior Living
Senior living communities offer healthcare services and wellness programs for aging adults. Rising demand from Baby Boomers makes this sector a growing investment opportunity.
Hospitality
Hospitality properties, such as hotels and extended-stay accommodations, cater to both business and leisure travelers. They offer income potential through room bookings, events, and ancillary services like dining and entertainment.
Student Housing
Student housing properties are located near colleges and universities, offering steady rental income driven by consistent student demand. They often feature amenities like study lounges, furnished units, and social spaces tailored to student lifestyles.
STEPS TO INVEST IN A DST
Consult Professionals
Engage a trusted financial advisor, such as Aimpoint Investments, along with a tax professional and real estate expert. Their combined expertise will help you navigate the complexities of DST investing, optimize tax benefits, and align your investment with your financial goals.
Identify Investment Opportunities
Work with Aimpoint Investments to explore and analyze a curated selection of DST offerings. Review property types, geographic locations, tenant profiles, and projected returns while evaluating the reputation and experience of the sponsors managing the properties.
Perform Due Diligence
Carefully assess the property portfolio, financial projections, market conditions, and the sponsor’s track record. Verify property occupancy rates, lease agreements, and maintenance plans to ensure they align with your risk tolerance and financial objectives.
Execute the Investment
Complete the required investment paperwork, which is typically done electronically for convenience. Transfer funds within the timelines necessary to maintain compliance with 1031 exchange deadlines (if applicable).
Monitor Performance
Regularly review the investment’s performance, including income distributions and property updates provided by the sponsor. Stay in touch with Aimpoint Investments for ongoing guidance and to discuss potential exit strategies when the DST matures.
DST | TIC | Fee Simple | |
|---|---|---|---|
Ownership Type | Fractional beneficial interest in a trust | Direct fractional ownership of property | Sole ownership or joint ownership of entire property |
Owner Control | Limited control; managed by a sponsor | Shared decision-making with other investors | Full control (if sole owner) |
Investors | Up to 499 | Typically up to 35 | Varies; often one or a few co-owners |
Management | None; handled by sponsor | Shared management responsibilities | Full responsibility (or hire property manager) |
Investment Minimums | Typically $100,000 | Property Dependent; often higher than DST | Full property value or share based on ownership |
Financing | Non-recourse, pre-arranged by sponsor | Individual responsibility for financing, often requires group consent | Complete control over financing options |
Liability | Limited liability | Shared liability with other investors | Full liability (can be limited with LLCs) |
Liquidity | Less liquid; difficult to sell interest | Less liquid; requires agreement from other investors | Potentially more liquid if marketable property |
Operational Flexibility | Limited; fixed terms and property improvements restricted | More flexible but requires group consensus | Full flexibility |
Diversification | Easier to achieve due to lower investment minimums | Limited, typically tied to a single property | Challenging, requires more capital and management |
Tax Advantages | 1031 exchange eligible | 1031 exchange eligible | 1031 exchange eligible |
Understanding the differences between ownership structures is essential to real estate investing. Delaware Statutory Trusts (DSTs), Tenants-in-Common (TICs), and fee simple ownership each offer distinct benefits and considerations, making them suitable for different types of investors and financial goals. The following table provides a comparison to help you evaluate these ownership structures. This guide is not all-inclusive, but highlights key differences that may influence your investment decision.
COMPARING DSTs, TICs AND FEE SIMPLE OWNERSHIP
BENEFITS OF DSTs
Passive Ownership
DSTs relieve investors from the day-to-day responsibilities of property management, such as tenant relations, maintenance, and rent collection. This hands-off approach makes DSTs ideal for those seeking a more passive investment strategy.
Portfolio Diversification
With DSTs, investors can allocate their proceeds across multiple properties, property types (such as commercial, multifamily, or industrial real estate), and geographic locations. This diversification helps mitigate risk and provides exposure to a broader range of real estate opportunities.
Access to High-Quality Properties
DSTs typically involve institutional-grade properties managed by experienced sponsors. These properties often have long-term, stable tenants, such as national retailers, healthcare facilities, or large apartment communities, providing the potential for consistent income.
Simplified 1031 Exchange Compliance
Since DSTs qualify as "like-kind" properties under IRS rules, they streamline the 1031 exchange process. Investors do not need to worry about the complexities of identifying and managing multiple replacement properties.
Non-Recourse Debt
DSTs often come with pre-arranged, non-recourse financing, which allows investors to satisfy debt replacement requirements for 1031 exchanges without personal liability. Non-recourse debt means the lender can only seek repayment from the property itself, not the investor’s personal assets, making it a lower-risk financing option.
Fractional Ownership
DSTs enable multiple investors to pool their resources and collectively own a share of large real estate assets. This fractional ownership model allows investors to participate in high-value properties that might otherwise be out of reach.
Preservation of Investment Timeline
DST investments can often be identified and acquired quickly, helping investors meet the strict 45-day identification and 180-day closing deadlines required for 1031 exchanges.
DST | TIC | Fee Simple | |
|---|---|---|---|
Ownership Type | Fractional beneficial interest in a trust | Direct fractional ownership of property | Sole ownership or joint ownership of entire property |
Owner Control | Limited control; managed by a sponsor | Shared decision-making with other investors | Full control (if sole owner) |
Investors | Up to 499 | Typically up to 35 | Varies; often one or a few co-owners |
Management | None; handled by sponsor | Shared management responsibilities | Full responsibility (or hire property manager) |
Investment Minimums | Typically $100,000 | Property Dependent; often higher than DST | Full property value or share based on ownership |
Financing | Non-recourse, pre-arranged by sponsor | Individual responsibility for financing, often requires group consent | Complete control over financing options |
Liability | Limited liability | Shared liability with other investors | Full liability (can be limited with LLCs) |
Liquidity | Less liquid; difficult to sell interest | Less liquid; requires agreement from other investors | Potentially more liquid if marketable property |
Operational Flexibility | Limited; fixed terms and property improvements restricted | More flexible but requires group consensus | Full flexibility |
Diversification | Easier to achieve due to lower investment minimums | Limited, typically tied to a single property | Challenging, requires more capital and management |
Tax Advantages | 1031 exchange eligible | 1031 exchange eligible | 1031 exchange eligible |
RISKS / CONSIDERATIONS
Illiquidity
DST investments are typically long-term and not easily sold or traded on a secondary market. Investors must often hold their interest until the property is sold, which can take several years, limiting flexibility.
Market Risk
Property values and rental income can fluctuate due to changes in economic conditions, local market dynamics, or tenant demand. Economic downturns or unexpected vacancies may impact the investment's performance.
No Control
Investors relinquish decision-making authority, as property management, leasing, and maintenance are entirely handled by the sponsor. This lack of control may not suit investors accustomed to direct property ownership.
Limited Debt Flexibility
DST investors cannot modify loan terms, refinance, or add capital once the structure is set. This may restrict adaptability to market changes or unexpected property expenses.
Sponsor Risk
The success of a DST investment depends heavily on the sponsor’s expertise and management capabilities. Poor property selection, inadequate oversight, or financial mismanagement by the sponsor can negatively impact returns.
Delaware Statutory Trusts provide a flexible and tax-efficient solution for real estate investors seeking passive income and portfolio diversification. By understanding the benefits and risks, and working with experienced professionals, investors can make informed decisions and maximize their investment potential.
For personalized advice and assistance with Delaware Statutory Trusts, contact Aimpoint Investments.