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  • Writer's pictureDon Meredith

Why Many Baby Boomers Consider DST 1031 Exchanges

Updated: Apr 22, 2021


Many savvy investors from the “Baby Boomer” generation own highly-appreciated real estate assets and income properties. However, as they enter retirement, some of these real estate investors would prefer to not deal with day-to-day property management– from maintenance problems, and tenant issues; to juggling rent checks and leases. Below you’ll learn why a Delaware Statutory Trust (DST) 1031 exchange may provide these investors with a worthwhile opportunity to move their investments into a more passive investment portfolio with added benefits.

What Is a Delaware Statutory Trust (DST)?

Delaware Statutory Trusts (DSTs) is a separate legal entity formed as a trust under Delaware law often used as a vehicle to hold title to real estate. DSTs or Delaware Statutory Trusts are generally represented by institutional quality properties or portfolios of properties that owners can exchange their investment property into while also performing a tax-deferred 1031 exchange, which allows for the deferral of capital gains taxes.

If properly structured, the DST will be classified as a grantor trust for federal income tax purposes and, as a result, the purchaser of a beneficial interest in the trust will acquire an undivided interest in the asset(s) held by the DST. An investor can use a beneficial interest in a DST as replacement property in a 1031 tax deferred exchange.

A Delaware Statutory Trust is formed as a private governing agreement under which either (1) property (real, tangible and intangible) is held, managed, administered, invested and/or operated; or (2) business or professional activities for profit are carried on by one or more individuals who act as trustees for the benefit of a party who is entitled to a beneficial interest in the trust property.

A Delaware Statutory Trust (DST) is structured so that each beneficiary (investor) owns a beneficial interest in the trust. The managing Trustee of the DST is either the Sponsor or an affiliate of the Sponsor. The DST holds title to 100% of the interest in the property. Tax reporting for a DST is done on a Schedule E utilizing property operating information provided by the Sponsor.

The IRS issued the Revenue Ruling 2004-86 that set forth parameters a DST must meet in order to be viewed as a grantor trust and qualify for a viable tax deferring vehicle. If the DST is structured responsibly, the parameters do not prohibit a successful business plan for a property. The following is a list of the parameters and the procedures generally accepted to comply with these limitations:

  1. The DST may not purchase additional assets other than short-term obligations. All cash from the property is held in liquid money market type accounts.

  2. The DST may not accept additional contributions of assets. There can be no additional capital calls to the DST. As part of the due diligence, the Sponsor conservatively anticipates the amount needed to properly maintain the property over the holding period and that amount is included in the initial capital raise.

  3. The DST may not renegotiate the loan terms and/or the loan may not be refinanced. The Sponsor has negotiated the loan terms for the property prior to acquiring the property. In the event the property is not sold before the loan matures, there are provisions in place to convert the DST to a limited liability company (“Springing LLC”). This allows the Trustee (Sponsor) the ability to take the necessary actions to remedy the situation if, for example, the property needed major capital improvements (not allowed within the DST structure) or the loan needed to be refinanced. This action will limit investors’ ability to conduct another 1031 exchange upon the sale of the property.

  4. The DST may not renegotiate leases or enter into new leases. The investors, through the Trust Agreement, enter into a Master Lease with the Trustee in order to avoid having to renegotiate leases or enter into new leases with the actual tenants.

  5. The DST may not make major structural changes. Any major improvements will be done or have been done by the seller prior to the Sponsor purchasing the property. Normal “turn-over” expenses fall within the DST guidelines and do not create an issue with the DST structure. Diversification does not insure a profit or guarantee against a loss.

  6. The DST must distribute all cash, other than the necessary reserves, to the beneficiaries.

  7. The DST may not sell or exchange property and reinvest the proceeds. The DST structure does allow for the investors or beneficial owners to conduct their own 1031 tax deferred exchange once the DST has liquidated its assets (i.e. sold the property).

Despite the name, Delaware Statutory Trust (DST) investments aren’t just for Delaware. They can be offered throughout the United States and can include a wide range of property types, including commercial and retail buildings, industrial properties, medical offices, multi-family apartment complexes, single-tenant rental properties and more.

What Are The Benefits of a Delaware Statutory Trust (DST)?

In addition to tax deferral benefits through 1031 exchanges, Delaware Statutory Trusts typically have relatively low minimum investments starting around $25k. This allows smaller investors to own a portion of a large, professionally managed commercial property along with other investors, not as a limited partner, but as an individual owner within the Trust. As part of a DST, each owner/investor receives their percentage share of the regular cash flow income, tax benefits, and potential appreciation (if any) of the entire property.

Another reason to consider a DST is that the cash proceeds from the sale of a single investment property can be exchanged into multiple DSTs. This  allows for a diverse portfolio of properties, which can be diversified by a variety of fund sponsors, property types, or geographical location. This diversification can help to reduce the risk associated with concentrated assets.

Ownership in a DST offers the typical benefits and risks an investor would receive as a single large-scale investment property owner, but without the responsibility of managing the properties. DST properties are managed by professional investment real estate asset managers and property managers. This is an especially attractive feature for owners who are hoping for less responsibility and who don’t want to deal with or pay a property management company to run their individual investment properties.

DSTs may also be effective for estate planning, since they can be easily inherited by beneficiaries, who will avoid paying taxes altogether as they will receive the asset on a stepped-up tax basis.

Potential Drawbacks of Delaware Statutory Trust (DSTs)

A DST investment is an investment in real estate; any investment in real estate is subject to market value and rental income fluctuations, tenant issues, vacancies, taxes and governmental regulations. There are costs and fees associated with a DST investment and management and the tax benefits must be weighed against the investment costs.

A DST owner does not maintain management control or dictate day-to-day property management operations. DST ownership is also subject to additional IRS regulations that affect the management of the property and your ownership interest. Investors should investigate and thoroughly understand these issues prior to investing in a DST offering.

Delaware Statutory Trusts (DSTs) investments are highly speculative and involve substantial risks. No public market is likely to exist for such investments, so it should be understood that there is a lack of liquidity. DST investments are not freely transferable and substantial restrictions may apply to the transfer of interests.

Is a Delaware Statutory Trust (DST) 1031 Exchange Right for You?

Want to know if a DST 1031 Exchange is right for you? Contact Tactical Income, led by Don Meredith, to learn more about DSTs and other innovative and successful investment strategies.

Since 1999, Don has specialized in real estate tax strategies with an emphasis on advising on 1031 Exchanges. He has written and lectured extensively on 1031 transactions pursuant to Section 1031 of the Internal Revenue Code, and Delaware Statutory Trusts (DSTs).

More About Don Meredith of Tactical Income, Inc.

Don Meredith is also a long-time member of the Alternative & Direct Investment Securities Association (ADISA), formerly the Real Estate Investment Securities Association (REISA),and also San Diego County Creative Investors. He is well known in the San Diego community through his time serving as President of the Rancho Santa Fe Rotary Club, his philanthropic work with Just in Time for Foster Youth, and his guest interviews on World Talk Radio and Business Talk Radio 1170 Intelligent Talk KCBQ in San Diego.

Don has published numerous articles on investing and his is book titled The DST Revolution: 1031 Exchange Into Retirement Mode, DST, and Philanthropy is available on Amazon in paperback or for Kindle.

The independent structure of Tactical Income allows Don to hold his clients’ interests at heart with fewer conflicts of interest. This also enables him to provide clients with a greater bandwidth of investment opportunities that may not be available at larger brokerage firms.

Contact Don Meredith of Tactical Income, to learn more about Delaware Statutory Trusts (DSTs) and 1031 Exchanges at: or (619) 726-6100.

Securities through LightPath Capital, Inc., Member FINRA/SiPC, 1560 E. Southlake Blvd., Suite 100 Southlake, TX 76092 925-899-1709 Direct 214-734-2957 Office

*** DST investments are illiquid, highly speculative and like all real estate, may involve substantial risks.  DST owners do not maintain control over management decisions and are subject to additional IRS regulations. Potential tax benefits must be weighed against the costs and fees associated with a DST investment and its management. 

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