Delaware statutory trusts

A Delaware statutory trust, a DST, solves two of the hardest problems in a 1031 exchange at once: finding a replacement property before the 45-day deadline, and not wanting to be a landlord anymore. A DST lets you exchange into a fractional interest in a large, professionally managed, institutional-grade property, an apartment complex, an industrial portfolio, a net-lease retail center, and become a truly passive owner. The IRS treats your DST interest as direct ownership of real estate, so it qualifies as 1031 replacement property. The catch is that “passive” means total loss of control, and that is not a bug, it is the law.

Why a DST interest counts as real estate

Normally a fractional interest in a trust would be a security or a partnership interest, neither of which is like-kind to real property. Revenue Ruling 2004-86 changed that. It established that a beneficial interest in a properly structured DST is treated as a direct interest in the underlying real property for federal tax purposes, which makes it eligible as 1031 replacement property. That single ruling created a multi-billion-dollar market, and DST equity raises have run into the billions annually.

The appeal is speed and passivity. Instead of racing to identify and close a replacement property in 45 and 180 days, you can invest in a DST interest in a matter of days, satisfying your exchange deadlines with room to spare. And once in, you do nothing: the sponsor and trustee handle all management. Typical minimum investments run around $100,000, so a DST also lets you split exchange proceeds across several properties for diversification.

Revenue Ruling 2004-86 lets a DST interest count as direct real estate ownership, so you can 1031 into a fractional, fully managed institutional property and close in days, not weeks.

The seven deadly sins, and what they cost you

To keep its favorable treatment, a DST must obey seven strict prohibitions, informally called the “seven deadly sins.” They exist to prevent the DST from being reclassified as a business entity, which would disqualify it. The trust cannot accept new capital after the offering closes, cannot renegotiate its loans or borrow new money, the trustee cannot enter new leases or renegotiate existing ones, cannot reinvest sale proceeds, must distribute cash rather than hold large reserves, is limited to capital repairs, and holds a single, defined property.

The practical meaning of these rules is that you, the investor, have no control whatsoever. You cannot vote on decisions, cannot replace the manager, cannot influence the business plan, and cannot exit until the sponsor decides to sell the property, which could be years. The very restrictions that make a DST legal for a 1031 also make it the most passive and least flexible way to own real estate. You have traded the toilets and tenants for total powerlessness.

The seven IRS restrictions that keep a DST legal also strip investors of all control: no voting, no manager changes, and no exit until the sponsor sells.

Who a DST fits, and who it does not

A DST fits an investor who is done being a hands-on landlord and wants to preserve their 1031 deferral, an aging owner exiting active management, someone who cannot find a replacement property in time, or an investor wanting to diversify a large exchange across several assets. Because it can be another 1031 replacement, the deferral chain continues, and if you hold the DST until death, your heirs get the stepped-up basis that erases the deferred gain entirely.

It does not fit an investor who wants control, or one hoping to use the property’s losses actively. Because the trustee holds all operational authority by law, a DST investor can never meet the material-participation tests, so DST depreciation losses are passive to the investor, useful against passive income but not a salary. And DSTs carry sponsor fees and load that reduce returns, and are illiquid for the life of the hold.

The bottom line

• A DST lets you 1031 into a fractional interest in an institutional property as a passive owner.
• Revenue Ruling 2004-86 treats a DST interest as direct real estate, so it qualifies as replacement property.
• It solves the 45-day deadline and the desire to stop being a landlord, closing in days.
• Seven IRS restrictions keep it legal and strip investors of all control and any early exit.
• It fits investors exiting active management; it does not fit those wanting control or active losses.

For the deadline pressure it relieves, read timeline rules. For the shared-ownership alternative, see tenant-in-common interests. For the full picture, start at the 1031 exchanges and exit planning hub.

Last verified August 2026.