Short answer: a Delaware Statutory Trust (DST) is a way to complete a [1031 exchange](/insights/articles/1031-exchange-for-dentists) into passive real estate — you own a fractional interest in institutional property that the IRS treats as like-kind, with no management responsibility. It’s popular with dentists who want to defer tax and step back from being a landlord, but DST interests are securities: illiquid, accredited-investor only, and out of your control.
What is a DST?
A Delaware Statutory Trust is a legal entity that holds one or more institutional-grade properties — say, an apartment community, medical office, or industrial building — and divides ownership into fractional beneficial interests. Under IRS guidance (Revenue Ruling 2004-86), a properly structured DST interest is treated as direct ownership of real estate, so it qualifies as like-kind replacement property in a 1031 exchange.
Why do dentists use DSTs?
- To complete a 1031 on time — DSTs are pre-packaged, so you can close within the 45/180-day windows.
- To go passive — a sponsor manages the property; you collect potential distributions without being a landlord.
- To diversify — you can split an exchange across several DSTs, properties, and markets.
- To access institutional real estate — bigger, professionally managed assets than most could buy alone.
- For estate planning — heirs may receive a step-up in basis, like other real estate.
What are the trade-offs and risks?
- Illiquidity — DSTs are long-term holds with no ready secondary market; plan to stay for years.
- No control — the sponsor makes all decisions; you’re a passive beneficiary.
- Fees — sponsor and offering costs reduce returns and should be understood up front.
- Accredited-investor requirement — DSTs are private securities offerings, not open to everyone.
- Sponsor and real-estate risk — returns and distributions aren’t guaranteed; property can underperform.
What happens when the DST sells?
When the DST’s property is eventually sold, you typically can 1031 again into another DST or property to keep deferring — or, in some structures, roll into a REIT via a 721 exchange for diversification and eventual liquidity. Each path has different tax and control consequences worth mapping out in advance.
Frequently asked questions
Yes. IRS guidance treats a properly structured Delaware Statutory Trust interest as like-kind real property, so it can serve as replacement property in a 1031 exchange. This lets investors defer capital-gains tax while owning real estate passively.
DSTs are illiquid long-term holds with no investor control, they carry fees, and they’re generally limited to accredited investors as private securities. Returns and distributions aren’t guaranteed, and you rely on the sponsor’s management. They suit investors who value passivity and tax deferral over liquidity and control.
Because a limited-partnership interest in a syndication is a partnership interest, which the tax code excludes from 1031 treatment. DSTs and tenant-in-common structures are used instead because they’re treated as direct real-property ownership and therefore qualify.
Sources
Founder & Financial Planner · Investment Adviser Representative · Series 63 & 65
Ian McGinnis is a financial planner and founder of Dental Wealth Partners, a non-commission, fee-only financial planning firm for dentists. He is the author of The Wealthy Dentist: Smarter Money. Less Stress. More Life. and hosts the Smiles & Cents podcast.
Keep reading
- What is a 1031 exchange, and how can a dentist use one?A 1031 exchange lets a dentist defer capital-gains tax by reinvesting real-estate sale proceeds into like-kind property. The rules, deadlines, and pitfalls.
- 721 exchanges and UPREITs for dentists, explainedA 721 exchange lets a dentist roll real estate into a REIT operating partnership tax-deferred, trading control for diversification and eventual liquidity.
- Real estate syndications for dentists: GP vs. LP explainedIn a real estate syndication, the GP runs the deal and the LP invests passively. What dentists should know about roles, private 1031s, risk, and access.