A Primer on Delaware Statutory Trusts
Everything you need to know about DSTs — how they work, the DST & UPREIT pathway, and a balanced view of the advantages and considerations.
What Is a DST?
A Delaware Statutory Trust is a legal entity formed under Delaware law that holds title to one or more real estate properties. Investors purchase fractional "beneficial interests" in the trust rather than directly owning real property. Critically, the IRS treats each investor's beneficial interest as direct ownership of real estate — which means DST interests qualify as "like-kind" replacement property under Section 1031 of the Internal Revenue Code.
In practical terms, a DST allows a retiring landlord to sell their rental properties, defer capital gains taxes through a 1031 exchange, and reinvest those proceeds into institutional-grade, professionally managed real estate — without ever having to manage another tenant, fix another toilet, or field another midnight phone call.
How a DST Works
The exchange pathway from property to passive ownership
Sell Portfolio
1031 Exchange
180 Days
Cash at Qualified Intermediary — time to research
Two Paths
Path 1
DST + UPREIT
Defer taxes, earn passive income, and access liquidity through a 721 exchange into REIT OP units.
Path 2
Take Cash & Pay Taxes
Receive proceeds directly and pay federal and state capital gains taxes on the full appreciation.
Sell Portfolio
1031 Exchange
180 Days
Cash at Qualified Intermediary — time to research
Path 1
DST + UPREIT
Defer taxes, earn passive income, and access liquidity through a 721 exchange into REIT OP units.
Path 2
Take Cash & Pay Taxes
Receive proceeds directly and pay federal and state capital gains taxes on the full appreciation.
Pros & Cons of the DST & UPREIT Path
The DST & UPREIT pathway is a powerful strategy — but it's not for everyone, and it's important to understand both sides. Remember: this isn't an all-or-nothing decision. You can allocate a portion of your proceeds to DSTs while keeping the rest in other investments.
Advantages
Full Capital Gains Tax Deferral
Defer 100% of federal and state capital gains taxes on the sale of appreciated properties through a 1031 exchange into a DST. Combined with a subsequent 721 UPREIT exchange, the deferral can continue indefinitely — and may be eliminated entirely through a stepped-up basis at death.
Elimination of Active Management
The DST sponsor handles all operations — leasing, maintenance, tenant relations, accounting, insurance, and compliance. Your role is entirely passive. After the UPREIT conversion, the REIT's professional management team continues to handle everything.
Access to Institutional-Quality Real Estate
Individual investors rarely have access to $50M–$200M+ Class A properties. The DST & UPREIT path provides fractional access to this institutional tier, managed by firms like Brookfield and Ares with hundreds of billions in real estate AUM.
Path to Liquidity After 2 Years
Once you convert to REIT OP units through a 721 exchange (typically after a 2-year minimum hold), you may have the option to redeem units for cash — giving you a path to liquidity without triggering the full deferred capital gains tax bill.
Zero Personal Liability
As a DST beneficial interest holder, you have no personal liability for the property's debt, operations, or legal exposure. Non-recourse financing means creditors cannot pursue your personal assets.
Portfolio Diversification at Scale
Split exchange proceeds across multiple DSTs in different property types, geographies, and sponsors. After the UPREIT conversion, your OP units represent an interest in the REIT's entire diversified portfolio — far broader than any single property.
Powerful Estate Planning Tool
OP units held at death may receive a stepped-up cost basis, potentially eliminating all deferred capital gains for your heirs. This makes the DST-to-UPREIT path one of the most effective intergenerational wealth transfer strategies available.
Flexible — Not All-or-Nothing
You don't have to put all your equity into a DST. Many investors allocate a portion of their 1031 proceeds to DSTs while directing the remainder to other strategies. The flexibility to calibrate your exposure is a key advantage of this approach.
Considerations & Risks
Illiquidity During the DST Hold Period
DST interests have no public trading market. Capital is generally locked up for the initial hold period (typically 2–5 years) before a 721 exchange becomes available. Plan your liquidity needs accordingly — though remember, you can allocate only a portion of your proceeds to DSTs.
No Management Control
Investors cannot influence property-level decisions — leasing, capital improvements, sale timing, or financing. For a retiring landlord ready to step away, this is by design. But if you want hands-on involvement, this path isn't for you.
Fee Structures
DSTs carry various fees including acquisition, financing, asset management, and disposition fees. Institutional sponsors like Brookfield and Ares typically operate with more transparent and competitive fee structures than smaller operators, but fees still reduce net returns.
Market and Property Risk
Like all real estate, DST properties are subject to market downturns, tenant defaults, rising interest rates, and property-specific issues. The institutional scale and diversification of the UPREIT path mitigates but does not eliminate these risks.
UPREIT Conversion Is Not Guaranteed
The sponsor's REIT typically retains the option — but not the obligation — to acquire DST interests in exchange for OP units. While institutional sponsors have strong incentives to complete these conversions, it is not a contractual guarantee.
Accredited Investor Requirement
DSTs require accredited investor status — generally net worth exceeding $1M (excluding primary residence) or income exceeding $200K/$300K. Minimum investment is typically $100K.
The DST & UPREIT path is designed for investors who want to exit active management, defer significant tax liabilities, and preserve optionality — including the ability to access liquidity or pass wealth to heirs. It works best when paired with institutional-caliber sponsors like Brookfield and Ares, whose scale and governance mitigate many of the risks associated with smaller DST operators.