Ron Nielsen

The Pros and Cons of Delaware Statutory Trusts for Real Estate Investors

Published on: June 5, 2025

When planning a 1031 exchange, many real estate investors explore Delaware Statutory Trusts (DSTs) as an option for reinvestment. DSTs present a unique opportunity for investors looking to defer capital gains taxes while enjoying the advantages of passive income and access to institutional-grade properties. But are DSTs always the right choice for your real estate portfolio?

This comprehensive guide explores the benefits and limitations of DSTs to help you decide if they align with your investment and financial goals.

What Is a Delaware Statutory Trust?

A Delaware Statutory Trust (DST) is an investment structure that allows multiple investors to own fractional interests in high-quality, professionally managed real estate assets. DSTs qualify as "like-kind" property under IRS Revenue Ruling 2004-86, meaning they are compatible with 1031 exchanges. With DSTs, real estate investors can defer capital gains taxes while investing in diverse property types like multifamily complexes, warehouses, and office buildings.

While DSTs offer significant advantages, they also come with certain restrictions and trade-offs. Below, we outline the primary pros and cons of DSTs to help you decide if they’re worth pursuing.

The Pros of DSTs for Real Estate Investors

1. 1031 Exchange Eligibility with Tax Deferral

DSTs are one of the few investment structures eligible for 1031 exchanges, allowing you to defer capital gains taxes by reinvesting proceeds from the sale of a property.

  • Tax Deferral: You can reinvest 100% of your sale profits into a DST, avoiding immediate taxation on gains. This prolongs your money’s compounding potential.

  • Ease of Transition: DSTs simplify 1031 transactions, eliminating the need to purchase and manage a replacement property directly.

2. Passive Income Without Management

Owning real estate has its perks, but active property management can be daunting. DSTs allow investors to enjoy truly passive income.

  • No Landlord Responsibilities: The sponsor manages everything from tenant relations to maintenance and financing, making it ideal for retirees or busy professionals.

  • Regular Distributions: Investors receive monthly or quarterly payments without needing to lift a finger.

3. Access to Institutional-Grade Properties

By pooling funds, DST investors can collectively purchase institutional-grade real estate assets that would otherwise be unattainable for individual buyers. Examples include Class A multifamily buildings, fulfillment centers leased to Amazon, or medical facilities with long-term tenants.

Benefits:

  • Diversification: Gain exposure to professional-grade assets across different sectors.

  • Quality Investments: DSTs often boast stable tenants with long leases, ensuring reliable cash flow.

4. Estate Planning Advantages

DSTs simplify estate planning compared to traditional property ownership.

  • Easier Transfers: Interests in DSTs can be divided among beneficiaries without complex legal processes.

  • Step-Up in Basis: Heirs may inherit DST interests with a stepped-up cost basis, potentially avoiding deferred taxes.

5. Optional Liquidity Through REIT Conversion

Some DSTs are structured to convert into a public or private REIT through a 721 exchange (UPREIT). If liquidity is a future priority, this feature is invaluable.

  • Tax-Deferred Liquidity: Transition your DST into REIT shares while retaining deferred capital gains.

  • Exit Strategy: Gain an accessible path to liquidity and diversification if needed.

The Cons of DSTs for Real Estate Investors

1. Lack of Control

DST investors relinquish all decision-making power to the sponsor. You cannot control property sales, refinancing, or tenant decisions.

  • For Active Investors: If you’re used to personally managing or improving properties, this loss of control may feel restrictive.

2. Limited Liquidity

DSTs are illiquid investments with predefined hold periods, typically lasting 5–10 years. Selling your interest prematurely is not an option in most cases.

  • Capital Lock-In: While income distributions provide cash flow, your initial investment remains inaccessible until the property is sold.

  • Suitability: Not recommended for investors requiring short-term access to their funds.

3. No Capital Improvements or Refinancing

IRS regulations prevent DST sponsors from making major upgrades or refinancing properties. This constraint reduces flexibility in responding to market fluctuations.

  • Limited Value-Add Opportunities: DSTs are not well-suited for investors looking to improve assets or pursue turnaround strategies.

4. Sponsor Risk

DST success depends heavily on the sponsor’s expertise and management. Poor oversight or mismanagement could erode investor returns.

  • Sponsor Diligence: Always vet the sponsor’s track record, underwriting, and fee structures before committing.

5. Potential Loss of Tax Step-Up

If you convert your DST interest into REIT shares via a 721 exchange, your heirs won’t inherit a stepped-up cost basis. While this preserves tax deferral, it foregoes the benefit of eliminating capital gains for estate planning purposes.

  • Trade-Off: Prioritize liquidity or tax benefits, depending on your long-term goals.

Is a DST the Right Choice for You?

A Delaware Statutory Trust can be a powerful tool for investors seeking hands-free, tax-efficient real estate exposure. It simplifies the complexities of asset management while offering steady income and estate-planning perks.

However, the limitations of DSTs must align with your goals. They may not be a fit if you value investment control, require liquidity, or wish to pursue value-add opportunities.

To determine if a DST is right for your real estate strategy:

  1. Conduct thorough due diligence on your sponsor and the properties in the DST portfolio.

  2. Consider your liquidity needs, tax strategy, and risk tolerance.

  3. Consult with financial advisors specialized in 1031 exchanges.

Partner with Medalist REIT for Expert DST Guidance

At Medalist REIT, we specialize in helping investors transition their properties into high-quality, income-producing DSTs tailored to their needs. With over $100M in assets under management, we’re your trusted partner for passive, tax-efficient real estate investing.

Want expert guidance on DSTs?

Email us at solution@medalistreit.com to schedule a 1-on-1 strategy session.

Unlock the full potential of your real estate portfolio with the power of DSTs.