Summary: Real estate investors navigating a 1031 exchange face tight deadlines, complex rules, and high stakes. Delaware statutory trusts (DSTs) offer a flexible, tax-efficient path forward, helping investors defer capital gains, simplify estate planning, and position assets for the next generation.
Today’s real estate investment landscape is constantly evolving. For investors looking to defer taxes, exit active property management, or position assets for the next generation, the pressure to make the right moves, quickly and correctly, has never been greater.
Delaware statutory trusts (DSTs) have become a go-to tool for real estate investors and fund sponsors alike. For investors, they offer a streamlined, tax-efficient way to reinvest proceeds without the pressure of finding replacement property on a tight deadline. For sponsors, they provide a strategic vehicle to raise capital and offer professionally managed opportunities to a broad investor base.
But DSTs offer more than a path through a 1031 exchange. They’ve become one of the most versatile tools in real estate tax planning, helping investors defer capital gains, resolve co-ownership disputes, and position significant wealth for the next generation. With baby boomers continuing to transfer real estate assets at scale, understanding how DSTs fit into a broader estate planning strategy has never been timelier.
To help navigate today’s dynamic environment, Aprio Tax Partners Jim Lockhart and Jim King recently hosted a webinar alongside Paul Abdow, Managing Director at Net Lease Capital; Cameron Weil, Shareholder at Polsinelli; and Jeff Peterson, President of CPEC1031.
Keep reading for a full recap of the discussion.
What is a DST and How Does it Qualify for a 1031 Exchange?
A DST is a trust that holds real property. Investors purchase a beneficial interest in the trust rather than buying a property outright. In 2004, the IRS issued guidance confirming that an investment in a properly structured DST qualifies as “like-kind” real property for purposes of a Section 1031 exchange. That ruling opened the door to a flexible, institutionally managed alternative to buying replacement property on your own.
The appeal is straightforward. Instead of scrambling to find and close on a replacement Walgreens or apartment building before your deadline, you can invest in a fractional interest in an institutional-grade asset, a multifamily community, an industrial portfolio, or a net lease retail center, and satisfy your 1031 requirements in as little as seven to 14 days.
The DST market has grown significantly since the 2004 ruling. As of mid-April 2026, there were 98 active DST sponsors in the market with approximately $3.7 billion in equity available, and $2.7 billion has already been raised year to date. In 2025, DST equity raises approached $8.4 billion, nearly matching the record set in 2022. Major institutional players, including Blackstone, Apollo, JLL, and Hines, have entered the space, a signal that DSTs are no longer a niche workaround — they’re mainstream real estate vehicles.
What are the Rules That Govern a DST?
Since the IRS blessed DSTs as 1031-eligible replacement property, the structure comes with strict operating constraints, commonly called the “seven deadly sins.” Four of these come up most often in practice:
- No debt refinancing or amendments. Once the DST is funded and the first investor dollar is in, you cannot refinance or amend the mortgage.
- No new leases. The DST cannot enter into new leases or renegotiate existing ones after formation.
- No material modifications. Capital improvements or significant property changes are not permitted within the structure.
- No capital calls. Unlike a typical limited partnership, the DST cannot call additional capital from investors. Reserves for maintenance and unexpected costs must be set aside upfront.
These rules make DSTs well-suited for stabilized assets — such as net lease properties, core multifamily communities, and industrial portfolios — rather than development projects or value-add plays.
One common workaround for multifamily assets involves a “master tenant” structure. The DST enters into a single lease with a master tenant entity, and that master tenant handles all ongoing leasing operations at the property. The master tenant structure is IRS-approved and helps sponsors manage day-to-day leasing without violating the no-new-leases rule.
From a tax reporting standpoint, a DST is treated as a grantor trust. The trust issues grantor letters and K-1s to investors. If the DST holds properties in multiple states, investors may find themselves with state filing obligations in each of those states, a detail that often surprises investors who were previously filing in only one state. It’s important to understand this before you invest, not after.
How Much Can a DST Earn? Is the Return Worth It?
A common question from investors evaluating DSTs is whether the returns justify the structure. Distribution yields typically range from 4% to 6% for leveraged DSTs and 5% to 6.5% for all-cash DSTs. On the surface, that may seem modest; however, context matters.
When you complete a 1031 exchange into a DST, you’re earning a return on your full pre-tax equity, not the amount left after paying capital gains. If a taxable sale would have cost you 30% to 40% of your gain — or in some cases, closer to 70% when you factor in state, local, recapture, and federal taxes — a 5% return on the full amount can outperform a higher yield on a reduced base. In other words, you’re compounding money you would have otherwise handed to the government.
As for hold periods, DST investors generally commit to a minimum of two years, with most holds ranging from two to five years. The terms of the underlying financing and master lease largely determine the timeline. Some structures extend to 20 years or longer, particularly high-leverage deals. Investors who want to set their investment on autopilot, especially those positioning assets for heirs to receive a step-up in basis, often welcome the longer hold.
Creative Uses of DSTs
Most people think of DSTs as a way to complete a 1031 exchange when you can’t find suitable replacement property on time. But DSTs can address a wider range of planning challenges.
Boot mitigation
If you sell a $10 million property and can only find an $8 million replacement, you have $2 million in “boot” taxable proceeds. A DST can absorb that $2 million, keeping it tax-deferred and invested rather than handed over to the IRS. Many investors also use a DST as a backup identification during the exchange process. Like any transaction, real estate deals can fall apart — but having a DST already identified under the three-property rule can save your exchange if your primary property doesn’t come through.
Estate planning
DST interests are divisible and passive. For investors who want to simplify wealth transfer, a DST holding can be split between heirs without the management headaches of a co-owned property. When an investor passes, heirs generally receive a step-up in basis, and a sale shortly thereafter typically results in little or no taxable gain. For investors in high-tax states with estate or inheritance taxes, transferring assets into DSTs located in other states before death can also help reduce state-level estate exposure.
Resolving co-ownership disputes
During the webinar, Jim King shared that he recently worked with two families who co-owned a commercial property in New York. The families held the property inside a C-corporation and had stopped speaking to each other. With double taxation inside the C-corp, recapture, and city and state taxes, the effective tax rate on a sale was approaching 70%. That number got both families to the table.
The solution: Jim worked with the families to sell the property inside the C-corporation, make an S-corporation election, and roll the proceeds into two separate DSTs, one for each family. Each family received their own interest; neither had to interact with the other, and a messy co-ownership situation was resolved cleanly. DSTs are flexible enough to address problems you wouldn’t initially expect them to.
Debt replacement and zero-cash-flow DSTs
Many investors selling leveraged properties face debt relief: income that becomes taxable if it is not offset. Investing in a levered DST helps mitigate that debt relief using non-recourse financing, so you’re not adding personal liability while still satisfying the exchange requirements.
There is also a specialized DST category — what Net Lease Capital’s Paul Abdow calls the “Swiss Army knife” of DSTs — that carries high leverage and produces no current cash distributions. These zero-cash-flow structures can address debt replacement, help distressed properties defer a tax problem for 20 or more years, and create pathways to future liquidity through potential REIT conversions.
DSTs and REITs: Understanding the 721 UPREIT Path
One increasingly common DST structure involves a pathway into a Real Estate Investment Trust (REIT) through what’s known as a 721 UPREIT. Here’s how it works: an investor completes a 1031 exchange into a DST. The affiliated REIT then holds a call option to acquire all DST interests. If exercised, investors contribute their DST interests to the REIT in exchange for operating partnership units, a transaction that is itself tax-free at the time of conversion.
The appeal of this strategy lies in diversification and potential liquidity; the tradeoff is finality. Once you’re in the REIT, you can no longer complete another 1031 exchange. Your tax deferral is locked, and future withdrawals above your original basis will be taxable.
Valuation risk is also worth understanding. DST sponsors typically mark up a property at syndication — loads of 6% to 15% are common — to cover costs and profit. If the property hasn’t appreciated enough to cover that markup by conversion time, investors may receive REIT units below par, sometimes significantly so. Not every structure offers a cash-out option at conversion, either. If preserving your ability to do another 1031 exchange matters to you, be sure to clarify your options before investing.
New IRS Guidance: a Potential Tax Break for Real Estate Investors
Separate from the DST discussion, there’s a meaningful development that real estate investors should be aware of right now. In March 2026, the IRS issued Revenue Procedure 2026-17, which affects real property trade or business elections made under Internal Revenue Code Section 163(j).
Section 163(j) limits interest expense deductions for certain businesses. Real property trade or business owners can elect out of that limitation. However, the tradeoff has historically been that they must use the alternative depreciation system, which eliminates certain bonus depreciation.
When recent legislation changed how the Section 163(j) limitation is calculated , the IRS responded by allowing what was previously an irrevocable election to now be revoked. That means investors who made a real property trade or business election in prior years can now evaluate whether revoking it and claiming bonus depreciation instead produces a better outcome.
Additionally, for those subject to the Bipartisan Budget Act (BBA), the IRS waived the requirement to file an Administrative Adjustment Request (AAR), which is a complex process. Instead, investors can simply file amended returns for 2022 and 2023 in the ordinary way. The anticipated deadline to file those amended returns is October 15, 2026. If your returns show limited interest expense, it’s worth reviewing them with your tax advisor now to see whether an amended filing makes sense.
Final Thoughts: Making the Most of DSTs in a Changing Market
DSTs have evolved well beyond a workaround for investors who can’t find replacement property in time. They’re a flexible, institutionally managed structure that can help investors defer taxes, simplify estate planning, resolve co-ownership disputes, manage leverage, and bridge into broader real estate vehicles.
That said, DSTs are complex. The rules are strict, the structures vary widely, and the right fit depends entirely on your situation: what you’re selling, what you owe, what your heirs need, and how long you’re willing to hold. Not every advisor in this space carries the same depth of experience, and the quality of your qualified intermediary, sponsor, and legal counsel matters enormously.
Before you start evaluating specific DST offerings, talk to your tax advisor and attorney about what your exchange requires. Understand your debt replacement needs, your identification strategy, and your estate goals first. That conversation will help you find the right solution, not just the first one that crosses your desk.
