Delaware Statutory Trusts: What Real Estate Investors Should Know

• The main takeaway: In recent years, the Delaware Statutory Trust (DST) has emerged as a powerful vehicle for real estate portfolio management.
• Impact on your business:  From legal structuring to tax reporting and estate planning, DSTs are not a DIY solution — but with the right team in place, they can help investors unlock a powerful path forward.
• Action steps: Contact Aprio’s Real Estate Services team to find out if a DST is right for you and your real estate investment goals.

The full story:

Like many real estate investors, you may be proactively searching for flexible, tax-efficient strategies to manage your investment portfolio. In recent years, the Delaware Statutory Trust (DST) has emerged as a powerful vehicle for portfolio management — especially within the context of 1031 exchanges. While DSTs have only been part of the investment landscape for the past two decades, they hold significant potential for real estate investors and sponsors.

In a recent Aprio-hosted webinar, a panel of subject matter experts and thought leaders in the field explored how DSTs work from a holistic perspective. Below, we recap their discussion, as well as compliance considerations and how investors can leverage DSTs for everything from estate planning to capital raising.

What is a Delaware Statutory Trust (DST)?

A DST is a legal entity created under Delaware law that allows multiple investors to hold fractional interests in institutional-quality real estate. When structured properly, DST interest qualifies as “like-kind” property under IRS Section 1031, meaning it can be used in a 1031 exchange to defer capital gains tax after the sale of investment property.

The DST acts as a passive investment vehicle. Investors receive regular income distributions from the DST without the responsibility of managing property — making the vehicle especially attractive for those looking to exit active management or diversify their holdings.

DST benefits

There are several key advantages to using DSTs, including:

• Tax deferral via 1031 exchange: As mentioned above, DSTs allow real estate investors to defer capital gains taxes by reinvesting sale proceeds into qualified real estate.
• Passive income generation: Real estate investors can receive regular income from DSTs without the day-to-day responsibilities of property management.
• Portfolio diversification: DSTs offer investors access to high-quality commercial real estate across various asset classes, including multifamily, healthcare, industrial, and more.
• Estate planning flexibility: DST interests are easily divisible, allowing real estate investors to benefit from tailored estate and succession planning.
• Low minimum investment: With DSTs, investors can participate in large-scale properties with minimums as low as $100,000.

The “7 deadly sins” of DSTs

IRS Revenue Ruling 2004-86 outlines the requirements DSTs must meet to qualify for 1031 exchanges. Commonly known as the “7 deadly sins” among members of the real estate community, these restrictions include:

1. No capital calls once the trust is established.
2. No renegotiation of leases or entering new leases.
3. No modifications to existing debt or obtaining new financing.
4. No development or major improvements — only minor, non-structural repairs.
5. No reinvestment of proceeds from the sale of property.
6. No cash-out refinancing.
7. No active property management — the trust must be purely passive.

Due to these rules, real estate investors must carefully structure and manage their DSTs to avoid disqualification and tax exposure. The compliance landscape can be complex, which means it’s critical for real estate investors to work with experienced tax advisors and legal counsel to manage their DSTs.

DST structures and master leases

To comply with IRS rules while still operating efficiently, DST sponsors often use a master lease structure. A master tenant entity — often controlled by the sponsor — manages the property and enters leases with actual tenants, insulating the DST from disqualifying activities while ensuring operations continue to run smoothly.

DST use cases beyond the 1031 exchange

While DSTs are commonly used for 1031 exchanges, their utility extends much further. The most typical and effective use cases include:

• Estate planning: DSTs allow investors to transition their investments from real estate “bricks” to shares, easing asset transfer to heirs and simplifying administration.
• Partnership dissolutions: DSTs can serve as a clean structure for dividing interests among partners who wish to exit or hold property differently.
• Zero-cash flow DSTs: These are specialized structures used for debt replacement, refinancing, foreclosure situations, and unlocking liquidity through tax-free refinancing.
• REIT integration via 721 exchanges: DSTs can serve as a transitional step into a REIT or fund structure via a tax-deferred “UPREIT” transaction, giving investors diversified exposure and potential liquidity.

Market trends and considerations

The DST sponsor landscape has doubled in just three years, with more than 50 active sponsors in the securitized space. While this growth offers more opportunities for investors, it also underscores the need for careful due diligence. Sponsors vary widely in experience, track record, and focus — so choosing the right partner is essential.

The bottom line

DSTs have evolved into a versatile tool for modern real estate investors. Whether you’re a seasoned investor looking to simplify management or a fund sponsor aiming to raise capital, DSTs offer tax advantages, flexibility, and access to institutional assets.

At the same time, DSTs are complex and investors who use them should enlist the guidance of experienced professionals. From legal structuring to tax reporting and estate planning, DSTs are not a DIY solution — but with the right team in place, they can help investors unlock a powerful path forward.

If you want to explore DSTs and how they could benefit your real estate investment portfolio, schedule a consultation with Aprio today.

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