A fractional interest that qualifies as like-kind
A Delaware Statutory Trust is a legal entity that holds title to one or more real-estate assets. Investors purchase beneficial interests in the trust, owning an undivided fractional share of the underlying property and its income. Because of a 2004 IRS ruling, a beneficial interest in a properly structured DST is treated as a direct interest in real property — so it qualifies as like-kind replacement property in a 1031 exchange.
In practical terms, a DST lets an investor exchange out of a property they actively managed and into a passive, professionally managed interest in larger, often institutional-quality real estate they could not access on their own.
Why the IRS allows it: Revenue Ruling 2004-86
IRS Revenue Ruling 2004-86 established that a beneficial interest in a DST can be treated as a direct property interest for Section 1031 purposes. To preserve that treatment, the trust must operate within strict limits — often called the “seven prohibitions” — which constrain what the trustee may do. In broad strokes, once the offering closes the DST generally cannot:
- accept new capital contributions from investors;
- renegotiate existing loans or borrow new funds (except in limited distress situations);
- reinvest sale proceeds rather than distribute them;
- make major capital improvements beyond normal repairs and what a lease requires;
- actively renegotiate leases or enter new ones, except on default or expiration.
These limits make a DST a relatively static, pre-packaged vehicle: the business plan is largely fixed at the outset, which is part of its appeal and also one of its constraints.
Common benefits
- Speed and certainty of closing. A DST is already acquired, financed, and available, which helps investors meet the 45- and 180-day deadlines — and serves as a backup if another deal stalls.
- Passive ownership. No tenants, toilets, or trash — the sponsor handles management.
- Access and diversification. Smaller exchange amounts can access institutional assets and can be spread across multiple DSTs, property types, and geographies.
- Pre-arranged, non-recourse debt. Any leverage is generally non-recourse to investors, which can satisfy the debt-replacement requirement without a personal loan.
- Estate planning. Fractional interests can simplify dividing an estate, and heirs may receive a step-up in basis.
Typical terms
DSTs are private securities offered only to accredited investors through a private placement memorandum (PPM). Minimum investments are commonly in the range of $25,000 to $100,000, holding periods are often roughly five to ten years and set by the sponsor, and assets span multifamily, net-lease retail, industrial, self-storage, healthcare, and other sectors. The PPM is the controlling document — it contains the full terms, fees, and risks.
Who a DST suits — and who it does not
A DST may fit an investor who wants to stay invested in real estate but is ready to give up active management, who needs to place exchange proceeds quickly, or who wants to diversify a single large gain across several assets. It is generally not a fit for someone who wants control over the property, needs liquidity, or cannot tolerate the risks covered in DST risks and considerations. Eligibility is limited to accredited investors.
- A DST holds real estate and sells fractional beneficial interests that qualify as 1031 like-kind replacement property.
- IRS Revenue Ruling 2004-86 permits this, subject to strict limits that keep the vehicle largely static after closing.
- Benefits include passive ownership, fast closing, access to institutional assets, non-recourse debt, and estate-planning flexibility.
- DSTs are private securities for accredited investors, sold via a PPM, typically illiquid for a multi-year hold.
- They suit investors ready to trade control for passivity and diversification — not those who need liquidity or control.