Delaware Statutory Trust guide

Delaware Statutory Trusts and 1031 exchanges: how they work, who they fit, and the risks

Delaware Statutory Trusts can turn a hands-on rental into passive, diversified real estate inside a 1031 exchange. They also lock up your money, take away your control, and come with fees. Here's how to weigh both sides.

By Scott Ward, CFP®, AIF®, AIFA®, SVP, Wealth Advisor, Compound Planning · Updated · 12 min read

When people sell a rental property they've owned for years, they often want two things that seem to pull against each other: to keep their tax deferral through a 1031 exchange, and to stop being a landlord. A Delaware Statutory Trust is one of the few tools that can do both. That's why Delaware Statutory Trusts come up so often in 1031 conversations, and why it's worth understanding them clearly before anyone hands you an offering document.

I've written about Delaware Statutory Trusts for U.S. News & World Report, including in How to Build Passive Income With Real Estate Investing and 5 Alternative Investments Every Investor Should Consider in 2026, and in Compound's guide 1031 Exchange Planning With Delaware Statutory Trusts. My view is consistent: Delaware Statutory Trusts can be a useful part of a plan, but they are not a universal answer and they are not "safe."

What is a Delaware Statutory Trust?

A Delaware Statutory Trust is a trust formed under Delaware law that holds title to one or more properties. Investors buy "beneficial interests" in the trust, which gives each of them a fractional share of the property's income and value. A sponsor company finds the property, arranges any financing, sets up the trust, and manages the asset, often through a master lease.

The properties tend to be larger and more institutional than what an individual investor would buy alone: apartment communities, industrial and logistics buildings, medical office buildings, necessity-based retail, self-storage, and similar commercial assets. Minimum investments are commonly in the range of $25,000 to $100,000, depending on the offering.

DST interests are securities, usually sold in private placements. That means they come with a private placement memorandum (PPM) that describes the property, the sponsor, the fees, and the risks, and they are generally available only to accredited investors.

How a Delaware Statutory Trust works in a 1031 exchange

In Revenue Ruling 2004-86, the IRS explained how an interest in a properly structured DST can be treated as a direct interest in real estate for 1031 purposes. That's what allows you to sell a rental house or a commercial building and exchange the proceeds into DST interests while keeping your tax deferral.

To keep that treatment, the trust has to stay very passive. These limits are often called the "seven deadly sins." Broadly, once the offering closes, the trustee generally can't:

  • accept new capital from current or new investors;
  • renegotiate the existing loan or take on new borrowing (except in limited cases such as tenant bankruptcy or insolvency);
  • reinvest proceeds from selling the property;
  • make capital improvements beyond normal repairs and maintenance, minor non-structural changes, or those required by law;
  • hold cash reserves in anything but short-term debt obligations;
  • keep cash instead of distributing it, after reasonable reserves; or
  • enter new leases or renegotiate existing ones, apart from limited exceptions.

Those rules are what make the tax treatment work, and they are also the source of many of the risks. If a property runs into trouble, the trust has very few levers to pull.

The 1031 rules still apply in full. You still need a qualified intermediary, you still need to identify within 45 days and close within 180 days, and you still need to reinvest your equity and replace debt to defer all of the tax. DSTs usually carry non-recourse debt at the trust level, which can make it easier to match the debt you paid off when you sold.

Three ways investors use Delaware Statutory Trusts in an exchange

  1. As the main replacement property. An investor who wants to step away from management exchanges most or all of the proceeds into one or several DSTs.
  2. As a partial allocation. An investor buys a property directly and puts the remaining equity into a DST, rather than taking taxable cash.
  3. As a backup during the 45-day window. Because DST interests are usually available on short notice, investors often name one as one of their three identified properties in case a direct purchase falls through.

The best time to evaluate Delaware Statutory Trusts is before your sale closes, when you can compare offerings and sponsors calmly instead of under deadline pressure.

Potential benefits

  • Passive ownership. No tenants, toilets, or repair calls. The sponsor runs the property.
  • Diversification. You can spread proceeds across several properties, property types, and regions instead of putting everything into one building.
  • Access to larger properties that individual investors usually can't buy alone.
  • Timing flexibility. DSTs can help you meet the 45-day and 180-day deadlines, either as the plan or as the backup.
  • Simpler debt replacement. Trust-level, non-recourse financing means no personal loan application or guarantee.
  • Estate planning. Fractional interests can be easier to divide among heirs than one building, and under current law heirs may receive a step-up in basis.

None of these benefits guarantees a good investment. Income and appreciation depend entirely on the property, the market, and the sponsor.

Risks and trade-offs

This is the section that matters most. Anyone who tells you a Delaware Statutory Trust is risk-free is selling, not advising.

  • Illiquidity. Expect to hold for five to ten years, sometimes longer. There's no meaningful secondary market, and you generally can't get your money out early. Don't use money you might need.
  • No control. You don't vote on leasing, refinancing, or when to sell. The sponsor decides, within the trust's limits.
  • Fees and loads. Offerings typically carry upfront costs such as selling commissions, offering and acquisition costs, plus ongoing asset-management fees and a share of profits at sale. Together these can take a meaningful share of your equity before your money starts working. Read the "use of proceeds" table in the PPM.
  • Sponsor risk. A DST is only as good as the company running it. Look for a full-cycle track record: properties bought, held, and sold, with projected versus actual results.
  • Property, tenant, and market risk. Vacancies, a tenant bankruptcy, falling rents, or rising cap rates can reduce income and value. You can lose money, including principal.
  • Debt risk. Because the trust can't refinance, the loan's maturity date can force a sale at a bad time. Higher leverage magnifies both gains and losses.
  • Distributions aren't guaranteed, and some may be a return of your own capital from reserves rather than property income.
  • Structural rigidity. If a property needs new capital or a new loan, the trust may have to convert to another structure (often an LLC), which can complicate future tax treatment.
  • Concentration in the exchange. Putting all of your proceeds into a single offering trades one concentrated risk for another.

For a regulator's view, read the SEC's and FINRA's investor materials on private placements, and always read the PPM's risk factors in full.

Who a Delaware Statutory Trust may fit, and who it doesn't

A DST may be worth a look if you:

  • are an accredited investor (generally $1 million+ in net worth excluding your home, or income above $200,000 individually or $300,000 jointly in each of the last two years, with the same expected this year);
  • have a meaningful embedded gain and want to keep deferring it;
  • want to step away from hands-on management, often around retirement;
  • have other liquid savings, so you won't need this money for years; and
  • value diversification across properties more than control.

A DST is probably not a good fit if you might need the money within a few years, you enjoy running property and want to keep growing a portfolio, your gain is small enough that fees could outweigh the tax you'd defer, or you aren't accredited.

Questions to ask before you invest in a Delaware Statutory Trust

  1. What is the total upfront load, as a percentage of my equity?
  2. What are the ongoing fees, and what is each one calculated on?
  3. Are projected distributions covered by property cash flow, or partly funded from reserves?
  4. What is the sponsor's full-cycle track record, including deals that underperformed?
  5. What is the loan-to-value ratio, the interest rate, and when does the loan mature?
  6. How concentrated is the tenant base, and how long are the leases?
  7. What is the expected hold period and exit plan?
  8. How is the person recommending this paid, and what conflicts do they have?

That last question applies to everyone, including me. As a CFP® professional, I'm required to act as a fiduciary when providing financial advice to a client, which includes disclosing material conflicts of interest. How I'm paid is described in Compound Planning's Form ADV Part 2A; ask me about any compensation related to a recommendation.

How Delaware Statutory Trusts end

When the sponsor sells the property, investors usually have three choices: take the cash and pay the deferred tax; do another 1031 exchange into new real estate (including another DST); or, in some offerings, exchange into a REIT's operating partnership through a Section 721 exchange. A 721 exchange can add flexibility later, but it generally ends your ability to do future 1031 exchanges with those units, so weigh it carefully.

Your answer should come from your plan: your income needs, your other assets, your age, and your estate goals. That's the work I do with clients at Compound Planning, alongside their qualified intermediary, CPA, and attorney. If you're in Alabama, see 1031 exchange and DST planning in Birmingham. If you work with exchange clients as a QI, agent, or CPA, see how I work with partners, and for the income side, see retirement planning.

Scott Ward and Compound Planning do not act as qualified intermediaries. See the disclosures below.

Delaware Statutory Trust interests are speculative, illiquid securities offered by private placement memorandum to accredited investors only.

Delaware Statutory Trust FAQ

Can a Delaware Statutory Trust be used in a 1031 exchange?

Yes. Under IRS Revenue Ruling 2004-86, an interest in a properly structured Delaware Statutory Trust can be treated as like-kind real estate for a 1031 exchange. All of the usual exchange rules still apply, including the qualified intermediary and the 45-day and 180-day deadlines.

How long is the typical hold period for a DST?

Many Delaware Statutory Trusts are designed to hold their properties for roughly five to ten years, but the sponsor decides when to sell, and the hold can be longer. You generally can't cash out early.

Do I have to be an accredited investor to buy a DST?

Generally, yes. Most Delaware Statutory Trust offerings are private placements limited to accredited investors, such as individuals with more than $1 million in net worth excluding their primary residence, or income above $200,000 individually or $300,000 jointly in each of the last two years.

Are DST distributions guaranteed?

No. Distributions depend on the property's performance and can be reduced or suspended. Some distributions may come from reserves rather than property income. You can also lose principal.

Can I use a DST as a backup in my 1031 exchange?

Yes. Many investors name a Delaware Statutory Trust offering as one of their identified properties in case a direct purchase falls through, because DST interests are usually available on short notice. It's best to vet the offering before your sale closes.

Can a financial advisor help with a Delaware Statutory Trust from out of state?

Yes. Delaware Statutory Trust interests are generally offered as securities to accredited investors across the country, and the property can be in a different state from you and your advisor. Reviewing offering documents, sponsors, fees, debt, and fit with your plan can be done by video and phone. Scott Ward is based in Birmingham, Alabama, and works with clients nationwide, including throughout the Southeast, through Compound Planning, Inc., where it is registered or exempt from registration.

What happens when a DST sells its property?

Investors typically choose to take cash and pay the deferred tax, do another 1031 exchange, or, if offered, contribute their interest to a REIT operating partnership through a Section 721 exchange, which generally ends future 1031 eligibility for those units.

Further reading from Scott in U.S. News

Back to the complete 1031 exchange guide →

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