DSTs and 1031 Exchanges: Delaware Statutory Trusts Explained

The definition

What is a Delaware statutory trust (DST)?

A Delaware statutory trust (DST) is a trust that holds real estate for many investors. Its structure lets a property seller exchange into a DST interest under section 1031 without recognizing gain, under IRS Revenue Ruling 2004-86. A syndication LP or LLC interest generally can't be used that way. That is why DSTs are the main route for 1031 exchange money into a property run by a sponsor.

How does a Delaware statutory trust work?

A Delaware statutory trust works by keeping its trustee almost passive. Investors buy beneficial interests, and the trustee holds the property and passes on the rent. The IRS treats the trust as an investment trust, taxed as a trust, only because the trustee's powers are tightly limited. In the facts the IRS approved, the trustee faced five limits.

• It can't accept new money from investors once the offering closes.
• It can't sell the property and buy another, and may hold cash only in short-term investments.
• It can't renegotiate the loan or borrow more.
• It can't renegotiate the lease or sign new tenants, except when a tenant is bankrupt or insolvent.
• It can make only minor, non-structural changes to the property.

Practitioners call these limits the "seven deadly sins," but that phrase is industry shorthand and does not appear in the ruling. The limits explain how DSTs behave. They suit stable properties on long leases, such as net lease properties held in DSTs. Because the trustee can't bring in new capital, a vacancy or a maturing loan can force a sale or a conversion.

Syndications

Can you 1031 exchange into a syndication as an LP?

You generally can't 1031 exchange into a syndication as an LP, because an LP interest is not real property. Since the 2017 tax law, section 1031 covers only real property exchanged for like-kind real property. An LP or LLC interest is an interest in an entity, not in real property.

Before 2018 the statute listed "interests in a partnership" as excluded. Congress removed those words because the real-property-only rule made them unnecessary.

To defer the gain on a rental property sale, the replacement has to be real property itself, a tenancy-in-common share, or a DST interest. A typical syndication offering is none of those.

Can you 1031 out of a syndication when it sells?

You generally can't 1031 out of a syndication one investor at a time. When a syndication sells, the partnership owns the property. Each LP holds a partnership interest rather than a share of the building, so the LPs can't each exchange their part.

The exception in section 1031(e) covers a partnership that validly elects out of the partnership tax rules under section 761(a). The IRS then treats the owners as holding the property directly. Tenancy-in-common structures rely on that.

For most LPs the sale is a taxable event, explained in the guide to taxes when the property sells. Selling your interest before the deal ends doesn't open a 1031 either. The guide to selling an LP interest early covers what is possible.

Exchange rules

How does a 1031 exchange work?

A 1031 exchange lets you defer tax on the sale of real property held for business or investment by acquiring like-kind real property. Property held mainly for sale doesn't qualify, and U.S. and foreign real estate are not like-kind to each other. The deadlines are fixed by statute:

• Identify the replacement property within 45 days after you transfer the old one.
• Receive it within 180 days, or by your tax return's due date (with extensions) if that comes first.
• Any cash or other non-like-kind property you keep, called boot, is taxed up to the amount of your gain.

Exchanges in practice usually run through a qualified intermediary that holds the sale proceeds. Section 1031 was not changed by the 2025 tax law. The result is tax-deferred, not tax-free: the deferred gain carries over into the replacement.

DST or syndication

DST vs syndication: which fits a 1031 investor?

A DST fits a 1031 investor deferring a gain from a property sale. A syndication fits money that is not tied to an exchange. The structures trade tax eligibility for flexibility.

The trustee limits that make a DST eligible also mean it can't add value, raise capital in a downturn or replace a tenant at will. A syndication sponsor can do all three, but buying in usually means paying tax on your sale first.

Relli lists syndications, funds and joint ventures from sponsors it has reviewed, so its offerings suit money that is not on a 1031 clock. See open offerings.

Costs and risks

What do DSTs cost?

DSTs carry sales commissions far more often than other real estate offerings. Relli's analysis covered 218 DST and tenant-in-common offerings that filed Form D between October 1, 2025 and September 30, 2026. Of those, 75.2% reported sales commissions or finder's fees, with a median of 6.0% of the offering amount (middle half 5.0% to 8.4%). Across all 4,172 real estate offerings, 10.4% reported them, at a median of 5.0%.

Commissions are only part of the cost. Offering expenses, sponsor fees and any markup on the property sit in the private placement memorandum, so the total load is higher.

The same DST filings show a median stated minimum of $100,000 and a median offering size of about $31.7 million. Form D data is self-reported by issuers, and the SEC says it cannot guarantee its accuracy. Relli's review of real estate Form D minimums explains the method.

What are the risks of a DST?

A DST's main risks come from the same limits that qualify it for a 1031.

• There is usually no market for the interest, and money comes back mostly when the property sells.
• Distributions can be cut if rent falls, and the trustee can't raise money or re-lease freely to fix the problem.
• The tax result depends on the trust following the ruling's limits for as long as you own it.

DST sponsors raised about $8.41 billion of equity in 2025, according to Mountain Dell Consulting data reported by DST News in March 2026.

Other routes

What are the tenants in common 1031 exchange rules?

A tenancy in common (TIC) lets each investor hold a direct, undivided share of the title. That share can qualify for a 1031 exchange where an LP interest can't. The IRS set out conditions for ruling that co-owned property is not a business entity in Rev. Proc. 2002-22, including:

• No more than 35 co-owners, each holding title as a tenant in common.
• Unanimous approval to sell, lease or put a blanket mortgage on the property, or to hire a manager.
• Each co-owner free to transfer or partition its share, subject to rights of first offer.

Those are guidelines for getting an IRS ruling, not a blanket safe harbor.

Can you 1031 into a REIT, and what is a 721 exchange?

You can't 1031 directly into REIT shares, because shares are securities, not real property. The path some property owners use is a 721 exchange. Under section 721(a), "no gain or loss shall be recognized" when you contribute property to a partnership in exchange for a partnership interest. One example is operating partnership (OP) units in a REIT's operating partnership (an UPREIT).

The trade-offs follow from OP units being securities. They generally can't go into a later 1031 exchange, and redeeming them for cash or REIT shares is generally taxable. In DST-to-UPREIT programs, the 721 step generally happens only if the operating partnership exercises its option to buy the DST property at fair market value. Section 721 was not changed by the 2025 tax law either.

Day 45

What if your 45-day identification window is closing?

If your 45-day identification window is closing, the deadline does not move, and missing it generally makes the sale taxable. Relli can't recommend a replacement property, but these checks apply to any you consider.

1. Confirm your day-45 and day-180 dates with your qualified intermediary, counting from the day the old property transferred.
2. If the sale closed late in the year, plan to extend your return so the due date doesn't end the 180-day window early.
3. Check that each candidate is real property, a TIC share or a DST interest, never a syndication LP interest.
4. For a DST, read the minimum, the commissions and fees in the private placement memorandum (PPM), the loan terms and when the loan matures.
5. Ask who can buy. Most DST interests are sold as Regulation D private placements, usually to accredited investors, so check the offering's Form D and PPM.
6. Have a certified public accountant (CPA) confirm how much gain, and how much boot, your plan leaves taxable.

Exchange edge cases

Is a DST exchange tax-free, and where are DST interests sold?