Why are Delaware Statutory Trusts Good for 1031 Exchanges?
For real estate investors using a 1031 exchange, Delaware Statutory Trusts (DSTs) can provide a powerful way to defer taxes, diversify investments, and simplify ownership. DSTs are especially appealing to those transitioning out of active property management or seeking consistent income without day-to-day involvement.
Tax Deferral and Passive Ownership
DSTs are created to meet all of the requirements of a 1031 exchange, enabling investors to defer federal and state capital gains taxes, depreciation recapture, and the 3.8% net investment income tax. In many cases, this deferral preserves 30 to 40 percent of the sale proceeds, allowing that capital to remain invested in a new real estate investment.
Just as importantly, DSTs offer complete passive ownership. Investors no longer have to manage tenants, maintain properties, or handle unexpected repairs. This hands-off structure is especially attractive to retirees, busy professionals, or anyone looking to simplify their real estate holdings.
Access to High-Quality Real Estate
DSTs often hold institutional-grade real estate properties that are typically out of reach for individual investors. Examples include long-term leased warehouses, national retail grocery-anchored locations, and Class A multifamily developments, managed by established and experienced professionals.
This professional management and scale provides peace of mind and stability while still offering the benefits of real estate ownership.
Income and Financing Advantages
Many DSTs are structured to provide predictable monthly income, typically in the 5 to 5.5 percent annualized range. These steady distributions can be a valuable source of cash flow for investors looking for reliable returns.
Additionally, when the property being sold has debt, a DST can help meet the debt replacement requirement. Some DSTs come with built-in, non-recourse financing, allowing investors to replace debt without taking on new personal liability.
Diversification and Long-Term Planning
DSTs also offer the ability to diversify across asset classes and geographic regions. Investors can allocate their proceeds into multiple DSTs, each holding several properties. This helps reduce risk and balance exposure.
Because DST interests are easily divided and passed along, they can also support estate and succession planning. Many investors use DSTs not only to defer taxes but to set the next generation of owners up for success as part of a long-term wealth transfer strategy. Using this strategy avoids entangling your heirs in a complicated and potentially unworkable co-ownership structure.
Is a DST Right for You?
DSTs are not the right solution for every investor. But for those seeking a simplified, tax-efficient approach to real estate reinvestment, they offer a powerful blend of benefits.
To learn more about how DSTs are treated under IRS guidelines, see Revenue Ruling 2004-86.
Thinking about a 1031 exchange and wondering if a DST fits your goals? Let’s talk about your options. Feel free to call me, Jeff Peterson, at 612-643-1031, or email me at jeffp@CPEC1031.com.