A DST property is a commercial real estate asset — usually an apartment community, warehouse, medical office, or retail center — owned by a Delaware Statutory Trust in which you and other investors each hold a fractional beneficial interest. You don’t appear on the deed and you don’t manage anything. A professional sponsor runs the property, and you receive your share of the rental income. Most people who buy into one are using it to complete a 1031 exchange and defer capital gains tax on a property they just sold.
What You Actually Own
A Delaware Statutory Trust is a legal entity recognized under Delaware’s trust statute as separate from its owners.1Delaware General Assembly. Delaware Code Title 12 – Treatment of Delaware Statutory Trusts The trust itself holds legal title to the real estate. What you receive is a certificate of beneficial interest representing your proportional share of the trust’s equity and income.
The IRS confirmed this works for real estate investors in Revenue Ruling 2004-86. A DST organized within certain limits is treated as an investment trust rather than a partnership for federal tax purposes, and a beneficial interest in a qualifying DST counts as like-kind real property under Section 1031.2Internal Revenue Service. Revenue Ruling 2004-86 That second point is the reason the structure exists in its current form.
Most offerings cap participation at 499 beneficial interest holders. Minimum investments typically start around $100,000, though the sponsor sets the exact threshold in the offering documents.
What Kind of Real Estate Sits Inside a DST
Sponsors buy institutional-grade commercial properties — the kind of assets most individuals could never purchase on their own. They favor properties already leased and generating income on day one, not ground-up development. Common holdings include:
- Large multi-family apartment complexes with established occupancy
- Industrial warehouses and distribution centers, often on long single-tenant leases
- Medical office buildings leased to healthcare providers
- Retail centers anchored by tenants on long-term net leases
Most DST properties also carry mortgage debt, with loan-to-value ratios commonly in the 40% to 65% range depending on the property type and tenant quality. If you’re doing a 1031 exchange, the debt allocated to your interest counts toward the value of your replacement property, which matters for keeping the exchange fully tax-deferred.
Why Most Buyers Use a DST: The 1031 Exchange
Section 1031 of the Internal Revenue Code lets you sell investment real estate and defer capital gains tax by reinvesting the full proceeds into like-kind replacement property.3Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment A qualifying DST interest counts as like-kind property for that purpose. The appeal is practical: finding a direct replacement property within the exchange deadlines is hard, and a DST is already assembled, financed, and ready to accept your funds.
The 45- and 180-Day Deadlines
You have 45 days from the sale of your original property to identify potential replacements in writing. The identification must include a legal description, street address, or other clearly distinguishable name, and must be delivered to the seller of the replacement property or to your qualified intermediary. Giving it to your attorney, accountant, or real estate agent does not count.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
You then have 180 days from the sale to close on the replacement, or until the due date of your tax return (with extensions) for the year of the sale, whichever comes first.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 Neither deadline can be extended except after a presidentially declared disaster. Blow either one and the entire gain becomes taxable.
The Qualified Intermediary
You cannot touch the sale proceeds at any point during the exchange. A qualified intermediary — a neutral third party — holds the funds from your sale in a restricted account and wires them to the DST sponsor at closing. Treasury regulations establish this as a safe harbor, so using a qualified intermediary means you are not treated as being in receipt of the funds.5eCFR. 26 CFR 1.1031(b)-2 – Safe Harbor for Qualified Intermediaries You cannot act as your own intermediary, and neither can your agent, broker, accountant, attorney, or employee.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
Soaking Up Leftover Cash (Boot)
Any cash or non-like-kind property you receive during the exchange is called boot, and it’s taxable even if the rest of the transaction qualifies for deferral.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 DSTs are useful here because the relatively low minimum investment lets you place awkward leftover amounts into one or more interests, mopping up proceeds that would otherwise be hard to deploy into a whole property.
Who Can Invest
DST interests are sold as private placements under Regulation D, so only accredited investors can buy them. The SEC recognizes several ways to qualify. For individuals, the two most common are:6U.S. Securities and Exchange Commission. Accredited Investors
- Income over $200,000 in each of the prior two years individually, or over $300,000 jointly with a spouse or partner, with a reasonable expectation of the same in the current year.
- Net worth over $1 million individually or jointly with a spouse or partner, excluding the value of your primary residence.
Holders of certain professional licenses, including Series 7, Series 65, and Series 82, also qualify regardless of income or net worth.7eCFR. 17 CFR Part 230 – Regulation D – Rules Governing the Limited Offer and Sale of Securities If you don’t meet one of these tests, you can’t buy into a DST, no matter how willing the sponsor is.
What Your Role Looks Like After You Invest
You are entirely passive. You have no vote on management decisions, no authority over leases, and no role in operations. The sponsor — the professional real estate firm that put the deal together — handles tenant relations, maintenance, rent collection, and financial reporting for the life of the trust. A separate trustee maintains the trust’s legal existence in Delaware and signs formal documents but does not make business decisions about the property.
That passivity isn’t optional, and it extends to the trust itself. To keep the favorable tax classification, Revenue Ruling 2004-86 sharply limits what the trustee can do once the offering closes.2Internal Revenue Service. Revenue Ruling 2004-86 The trust cannot accept new capital contributions, refinance the mortgage, take on new debt, reinvest sale proceeds into a different asset, or negotiate new leases, with narrow exceptions for tenant bankruptcy or insolvency. Capital improvements are limited to minor, non-structural work unless the law requires more. Cash held between distributions can only go into short-term instruments like Treasury bills, and all cash beyond operating reserves must be distributed to investors currently.
The practical consequence: once you’re in, the property is locked in place. If interest rates fall, the trust can’t refinance. If the market changes, the trust can’t pivot. If leases are below market, the trust can’t renegotiate them. This rigidity is the price of the tax treatment.
How You Get Paid and Taxed
During the holding period, you receive your proportional share of the net rental income, typically paid monthly or quarterly. You also receive a proportional share of the property’s depreciation deduction, which offsets taxable rental income on your personal return and can substantially reduce — sometimes eliminate — the tax owed on your distributions.
When the trust eventually sells the property, you face capital gains tax on any appreciation and depreciation recapture tax on the deductions you previously claimed. You can defer both again by rolling your share of the proceeds into another 1031 exchange, including into another DST. Some investors repeat this cycle indefinitely. If you still hold the exchanged interest at death, your heirs may receive a stepped-up basis, potentially wiping out the deferred tax entirely.
Fees, Lockup, and the Risks That Come With the Structure
Sponsors charge fees at three stages. Upfront, you’ll pay acquisition fees, organizational costs, and offering expenses, deducted from your invested capital. During the hold, you’ll pay an annual asset management fee, and possibly a trustee fee. At the back end, a disposition fee is typically charged on the sale price. These fees vary meaningfully between sponsors and are disclosed in the Private Placement Memorandum. Higher fees do not reliably correlate with better performance.
DST interests are illiquid. There is no active secondary market. Projected holding periods generally run five to ten years, and the sponsor controls the timing of the sale. If you need to exit early and manage to find a buyer, expect to sell at a significant discount to the underlying property value.
The other risks follow from the structure itself. You have no control if the sponsor underperforms or the market turns, and the trustee cannot adjust strategy to respond. Sponsor financial stability directly affects your investment. Property values and occupancy can decline, and because the trustee’s options are limited, a downturn may reduce distributions or erode principal with no corrective action available. The risk factors section of the Private Placement Memorandum is where these are laid out in detail, and reading it carefully is the single most important step before committing.
How You Actually Buy In
Once you’ve chosen an offering, the sponsor or a registered representative provides a package of documents. The Private Placement Memorandum is the central disclosure, describing the property, structure, risks, fees, and terms. It is not reviewed by regulators, but issuers are expected to provide one, and an offering without a PPM is a red flag.8U.S. Securities and Exchange Commission. Private Placements under Regulation D – Updated Investor Bulletin You’ll also complete a subscription agreement setting your investment amount, a purchaser questionnaire, and accreditation verification. Under Rule 506(c), the sponsor must take reasonable steps to verify your accredited status, and one accepted method is a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA stating they have verified your status within the last three months.9U.S. Securities and Exchange Commission. Assessing Accredited Investors under Regulation D
Funds are then wired to escrow, or, in a 1031 exchange, sent directly by your qualified intermediary to the trust. After the sponsor reviews your paperwork and accepts your subscription, you receive a closing package confirming your beneficial ownership and your distribution schedule. From that point forward, your job is to collect income, review the annual reports, and wait for the sponsor to sell.