How to Use a Delaware Statutory Trust (DST) as Replacement Property in a 1031 Exchange
For many California investors, the biggest challenge in a 1031 Exchange is finding a replacement property within the strict 45- and 180-day deadlines that not only meets IRS requirements, but also aligns with their unique needs and investment goals. One option that has gained significant traction among Sacramento real estate investors is a structure that allows investors to own fractional interests in high-quality, institutional-grade real estate, known as the Delaware Statutory Trust (DST).
The addition of a prorations clause to the purchase and sale agreement can help determine how any prorations will be handled. To avoid confusion or unintended tax consequences, the prorations clause should clearly define the prorations as part of the exchange proceeds and state how these amounts are adjusted between the buyer and seller at closing.
DSTs can hold a variety of property types, including multifamily communities, office buildings, industrial facilities, and retail centers. These assets are acquired and managed by a professional sponsor, giving investors the potential benefits of real estate ownership without the headaches of day-to-day management.
When you purchase a beneficial interest in a DST, you acquire an undivided fractional interest in the trust’s real estate assets, in proportion to your investment. This direct ownership is why DSTs qualify for 1031 treatment, making them a powerful tool for investors seeking tax deferral, diversification, and passive income potential.
Here’s how the DST investment process works within a 1031 Exchange:
Step 1: An investor sells an existing investment property and identifies one or multiple DSTs as their replacement property.
Step 2: Instead of acquiring a new property directly, the investor buys shares of the DST(s) and completes their exchange.
Step 3: The DST sponsor manages the property, handling all aspects of property maintenance, leasing, and financial reporting.
Step 4: The investor receives passive income distributions from rental revenue and benefits from potential property appreciation, all without the usual headaches of landlording.
Step 5: After a set hold period (typically 5–10 years), the sponsor sells the property, and investors can cash out or reinvest in another DST or 1031 Exchange property to continue deferring taxes.
For California accredited investors facing a tight identification timeline, looking to diversify across multiple properties, or ready to step away from active management, a DST can be a strategic replacement property choice.
At Legacy Investment Real Estate, we specialize in guiding real estate investors through the 1031 Exchange process, helping identify and secure replacement properties that align with the legacy they want their investments to build.
If you’d like to explore how a DST might fit into your 1031 Exchange strategy, give our experienced team a call today.
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There are material risks associated with investing in private placements, Delaware Statutory Trusts (“DSTs”) and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Legacy Investments & Real Estate is independent of CIS and CAM.