How Does It Help You Defer Taxes on a Real Estate Sale?

Selling investment real estate property? Facing a large capital gains tax bill with depreciation recapture? Consider a Delaware Statutory Trust, or DST. It’s become one of the more popular tools for real estate investors looking to defer taxes while stepping back from the day-to-day responsibilities of property management.

What Is a Delaware Statutory Trust? A Delaware Statutory Trust is a legal entity created under Delaware law that allows multiple investors to hold fractional ownership interests in real estate. Instead of owning a building directly, you own a beneficial interest in the trust, which in turn owns the underlying property — anything from apartment complexes and self-storage facilities to medical office buildings or industrial warehouses. DSTs are typically structured and sold by real estate sponsors who assemble the portfolio, arrange financing, and handle all operations. Investors buy in with a minimum investment (often $25,000–$100,000) and receive a proportional share of income and appreciation, without any landlord duties.

Why DSTs Matter for Taxes: The 1031 Exchange Connection.  The tax benefit of a DST comes from its compatibility with a 1031 exchange, the IRS provision that lets real estate investors defer capital gains taxes when they sell one investment property and reinvest the proceeds into another “like-kind” property. In 2004, the IRS issued Revenue Ruling 2004-86, confirming that a beneficial interest in a DST qualifies as “like-kind” real estate for 1031 exchange purposes. This opened the door for investors to sell a property and roll their proceeds into a DST instead of buying another property outright.

How it Works …

• Sell your property and place the proceeds with a qualified intermediary (required for any 1031 exchange).
• Identify replacement property within 45 days — this can include one or more DST offerings.
• Close on the DST investment within 180 days of the original sale.
• Defer your capital gains, depreciation recapture, and net investment income taxes, just as you would with a traditional exchange.

Why Investors Choose DSTs Over Direct Property Ownership?

• Short Answer: In short, it’s passive ownership, no tenants to manage, no property to manage, no headaches because the sponsor manages everything.
• Diversification. You can split exchange proceeds across multiple DSTs and property types.
• Access to institutional-grade real estate. DSTs often hold properties an individual investor couldn’t afford alone.
• Solves the “45-day problem.” DSTs are pre-packaged and ready to close quickly, which helps investors under time pressure to identify replacement property. If you have ever used a deferred exchange, you fret from the time you sign the sales contract all the way through the 45-day identification period.
• Estate planning benefits. Heirs typically receive a step-up in basis, potentially eliminating deferred gains altogether.

DSTs aren’t without drawbacks. They’re illiquid, no secondary market to easily sell your interest, you have no control over management decisions, and returns depend heavily on the sponsor’s track record and the underlying property’s performance. DST offerings are also only available to accredited investors in most cases, and they carry fees that can reduce net returns.

The Bottom Line.  A Delaware Statutory Trust offers real estate investors a way to defer capital gains taxes through a 1031 exchange while shifting from active ownership to a passive, professionally managed investment. It’s a compelling option for those looking to simplify their real estate holdings without triggering a tax bill — but like any investment, it deserves careful due diligence and a conversation with a qualified tax advisor or financial professional before committing funds.

Call Weiss LLP for more information on whether this vehicle makes sense for you.