The Pros and Cons of Delaware Statutory Trusts for Real Estate Investors
When preparing for a 1031 exchange, many real estate owners explore Delaware Statutory Trusts as a way to reinvest proceeds while stepping away from hands-on management. DSTs provide access to institutional-grade real estate, maintain tax deferral, and offer predictable passive income, all without the responsibilities of being a landlord.
But like any structure, DSTs also come with limitations. Understanding both sides is essential before deciding whether a DST fits into your long-term strategy.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust is a legal structure that allows multiple investors to hold fractional interests in commercial real estate. Under IRS Revenue Ruling 2004-86, DST interests qualify as like-kind property for a 1031 exchange, making them an attractive option for investors seeking tax deferral.
DSTs typically own stabilized, income-producing assets such as multifamily properties, industrial buildings, or mission-critical net-lease facilities. The sponsor manages the property on behalf of all investors, who receive income distributions without taking on operational duties.
DSTs can offer meaningful advantages, but they also impose specific restrictions. Below are the major considerations.
The Pros of DSTs for Real Estate Investors
1031 Exchange Eligibility and Tax Deferral
DSTs remain one of the simplest ways to complete a 1031 exchange without buying and managing a full property on your own. Because DST interests meet the IRS definition of real property, investors can defer capital gains taxes and depreciation recapture.
Tax deferral preserves more investable capital.
DSTs remove the pressure of sourcing, negotiating, and closing on a replacement property on your own.
For many owners preparing for retirement or portfolio rebalancing, this simplicity is invaluable.
Passive Income Without Management
DSTs appeal to investors who want income from real estate but no longer wish to manage properties.
The sponsor handles tenant relations, leasing, maintenance, financing, and sale decisions. Investors receive scheduled distributions—typically monthly or quarterly—without involvement in day-to-day operations.
This creates an income stream that feels more like holding a financial asset than running a property.
Access to Institutional-Grade Real Estate
By pooling investor capital, DSTs acquire properties that individuals would rarely purchase alone. These may include:
• Class A multifamily
• Distribution centers leased to national tenants
• Medical offices with long-term agreements
• Essential retail on strong credit
Such assets often come with durable income streams and long-term leases, offering a level of security that smaller, individually owned properties may lack.
Estate Planning Benefits
DSTs can simplify wealth transfer for families.
Interests can be divided among heirs without forcing a sale.
Heirs often receive a step-up in basis if the DST interest has not been converted to OP Units.
Beneficiaries avoid disputes over how to divide or manage physical properties.
For families focused on easing administration for heirs, DSTs offer a clean solution.
Optional UPREIT Conversion for Liquidity
Some DSTs are designed with the option to transition—after a required holding period—into a REIT structure through a 721 Exchange. In that case, investors receive Operating Partnership Units that may later convert to REIT shares.
This creates a potential liquidity path while continuing to defer taxes. It also opens the door to broader diversification through the REIT’s larger portfolio.
The Cons of DSTs for Real Estate Investors
Lack of Control Over Decisions
Once invested in a DST, the sponsor controls all decisions. Investors cannot vote on refinancing, leasing, selling the property, or pursuing capital improvements. Those accustomed to making strategic property decisions may find the passive nature restrictive.
Limited Liquidity
DSTs are illiquid by design. Hold periods usually range from five to ten years, and investors should expect to remain invested until the sponsor sells the property.
While income flows regularly, the principal remains locked up until the full lifecycle of the DST is completed. Investors needing short-term liquidity should consider this carefully.
Restrictions on Capital Improvements and Refinancing
DSTs must follow strict IRS rules to maintain 1031 eligibility. As a result, major improvements, redevelopment projects, and refinancing activity are generally prohibited.
For investors who prefer value-add opportunities or who want flexibility to reposition a property, this structure may not align with their investment style.
Sponsor Dependence and Execution Risk
The performance of a DST depends heavily on the quality and discipline of the sponsor. Weak underwriting, excessive leverage, poor asset management, or conflicts of interest can negatively affect returns.
Before investing, it is critical to review the sponsor’s track record, reporting practices, tenant analysis, fees, and past results across multiple DST cycles.
Loss of Step-Up in Basis After a 721 Exchange
If an investor elects to convert DST interests into REIT OP Units through a 721 Exchange, heirs generally do not receive a step-up in basis on those units.
While the tax deferral continues, the estate-planning advantage tied to eliminating capital gains is removed. This trade-off should be evaluated based on the investor’s long-term goals, especially if liquidity is a priority.
Is a DST a Good Fit for Your Strategy?
DSTs can be highly effective for investors who:
• want passive, predictable income
• prefer professional management over hands-on ownership
• intend to complete a 1031 exchange
• prioritize estate planning simplicity
• seek access to institutional-quality real estate
However, they may not be suitable for investors who want control, liquidity, or value-add opportunities.
Evaluating a DST requires understanding your time horizon, risk tolerance, tax exposure, and long-term financial objectives.
Partnering With Medalist REIT for DST Expertise
Medalist REIT specializes in DST structures that are built for stability, income, and long-term value. With a focus on single-tenant net lease assets and optional UPREIT conversion strategies, we help investors align their real estate holdings with passive, tax-efficient solutions.
If you’re exploring whether a DST fits your goals, we’re here to help.
Email solution@medalistreit.com to schedule a personalized strategy conversation.
Understanding the pros and cons of DSTs empowers you to make informed decisions—and positions your real estate portfolio for the next chapter of growth.
