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1031 Exchange investors looking for diversification and non-management ownership can purchase interests in Delaware Statutory Trusts (DSTs) that hold title to one or more investment properties.  DST held properties are passive real estate investments that have professional asset management firms overseeing property acquisition, due diligence, loan sourcing when financing, asset management, property management when not triple net (NNN) leased, and property disposition.  This type of investment structure was created in Delaware in 1947, and in 2004 the IRS issued Revenue Ruling 2004-86 which permits real estate investors to perform a 1031 exchange into and out of a DST that holds title to real estate.  Today, DSTs are used for fractional 1031 exchange investments, offering investors an alternative way to benefit from management-free ownership while still potentially deferring up to 100% of the taxes that would otherwise be due from the sale of an investment property.

What is a DST 1031 Exchange Investment?

DST Investments are 1031 Exchange Solutions for Non-Management Ownership
How is DST Ownership Structured?
DST Investors receive their Pro Rata share of Distributions

When used as a vehicle to own real estate, a DST holds title to 100% of the underlying property within it, while each individual investor owns a “fraction” or percentage of the DST.  This percentage is held in the form of a “beneficial interest” in the DST.  Based on the amount of their beneficial interest in the DST, each investor receives a pro rata share of any income or loss of income as well as any appreciation or loss of value that is generated by the property held by the DST.  Investors also receive their pro rata share of all income tax shelters associated with the underlying property, such as interest paid on loans (when financed) and depreciation   of   structure(s),   as   well   as   any  other qualifying expenses (however, it is important to understand that utilizing certain tax shelters may generate  tax  or  financial  consequences in the future). Each DST may own one or more properties, and up to 499 investors may invest in a single DST (though most DST trustees limit the number of investors to fewer than 499).  Investors do not have voting rights over the operation of property owned by a DST.  Instead, a DST trustee (also known as an asset manager or sponsor) maintains 100% of the managerial duties of the asset(s) held by the DST.

What are the potential benefits of DST ownership?

Low Minimum Investment Amount

$100,000 for 1031 exchange investors. 


In a DST the lender does not need to underwrite or qualify any of the individual investors, as they are isolated from the operation of the property. The sponsor will generally be the signatory trustee of the DST. 


Greater Investment

Because capital gains taxes are deferred, the investor has a higher adjusted basis, creating greater leverage than if the tax liability was paid on a current basis. This may increase the investor's available equity for reinvestment. 



One large property can be exchanged into many DST properties, offering additional asset and geographical diversification. 

Compounding Effect

A property owner who conducts multiple 1031 exchanges and makes unrealized gains on each exchange will be able to reinvest the deferred capital gains on each subsequent exchange. A property owner who holds exchanged property until death avoids the deferred tax liability and his or her heirs inherit the property with a "stepped-up" tax basis. 


Property Life

An investor can exchange property that has reached a plateau for one that is on an upswing; an unproductive property can be exchanged for an income-producing property; a property that has been depreciated can be exchanged for a more expensive property which has more room for additional depreciation. 


Institutional-Grade Properties

An investor can access ownership in larger commercial properties that have traditionally been accessible only to very wealthy individuals, pension funds, insurance companies, and other institutional investors. DSTs may allow a client access to ownership in commercial properties that they may not otherwise be able to afford. 


Access to Pre-packaged Choices

DST Properties, Inc. has relations with sponsors who are offering properties for which they have generally already arranged financing, completed initial due diligence, and commissioned appraisals and environmental reports, prior to the property being presented to investors. 

DST Benefits
DST Risks
What are the potential risks of DST ownership?

Fees and Expenses

The cost to acquire a DST interest may be more than purchasing a property outright because of additional expenses of making the property available to multiple co-owners and marketing it in the form of a private security offering, including brokerage fees, which may outweigh the benefits of tax deferral. 


Past Performance

Past performance does not ensure or indicate future earnings, and property appreciation is not guaranteed. Principal reduction or loss may occur depending on the performance of the underlying real estate. 


Real Estate Risks

DST interests are direct investments in real estate and are subject to all risks of owning, operating and disposing of real estate. Results from investing in real estate vary through cyclical economic times. 


Reliance Upon Others

An investor purchasing DST interests relies upon the sponsor and property manager to make day-to-day decisions related to the property. 


Illiquidity DSTs

are illiquid investments. There is currently no established secondary market for the resale of DST interests. Additionally, DST investors do not have legal title of property held by the DST, Beneficial Owners do not have right to sell the property. 



DST investments may not be suitable for all 1031 exchange investors. 


Conflicts of Interest

Conflicts of interest may exist that could adversely affect the investment. 


Limited Control

Beneficial Owners possess limited control and rights. The trust will be operated and managed solely by the Trustee. Beneficial Owners have no right to participate in the management of the trust. 


General Real Estate

Risks Risks related to an investment in real estate. Real property investments are subject to varying degrees of risks including but not limited to: the speculative market and financial risks associated with fluctuations in the real estate market; loss of principal; variations in occupancy which may negatively impact cash flow; limited liquidity; limits on management control of the property; and changes in the value of the underlying investments. 


DST Structure Limitations

The DST structure has certain limitations and must operate within the following guidelines. Failure to do so may cause actions that would likely preclude investors from conducting further 1031 exchanges and may adversely impact the value of their investment.

  • Once the offering is closed, there can be no future contribution to the DST by either current or new Beneficial Owners.

  • The Trustee cannot renegotiate the terms of the existing loans, nor can it borrow any new funds from any party.

  • The Trustee cannot reinvest the proceeds from the sale of its real estate.

  • The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements, and (c) those required by law.

  • Any cash held between distribution dates can only be invested in short-term debt obligations.

  • All cash, other than necessary reserves, must be distributed on a current basis.

  • The Trustee cannot enter into new leases or renegotiate the current leases. 

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