Delaware Statutory Trust

A Delaware Statutory Trust (DST) is a legal entity formed under Delaware law that holds title to income-producing real estate and divides beneficial ownership among many investors. In Revenue Ruling 2004-86, the IRS held that a beneficial interest in a properly structured DST is treated as a direct interest in real property, which means investors can use DST interests as replacement property in a 1031 exchange and defer capital gains tax. This made the DST a leading vehicle for investors who want to satisfy a 1031 deadline and move from active management to passive ownership. A sponsor acquires institutional-grade property, places it in the trust, and sells fractional beneficial interests, often with low minimums such as $100,000, allowing investors to diversify across several DSTs. Investors receive their pro-rata share of net rental income and any appreciation on sale, but they have no management authority and cannot make decisions about the property. To preserve the favorable tax treatment, the DST must observe the "seven deadly sins" restrictions from the revenue ruling, which prohibit the trust from, among other things, raising new capital, renegotiating loans, or reinvesting sale proceeds. DST investments are illiquid, available only to accredited investors, and carry the usual real estate risks.