Delaware Statutory Trust (DST) Rules, Fees, Risks, and Restrictions
If you’re considering completing a 1031 exchange, you may be tempted to opt for a Delaware Statutory Trust (DST). But before you commit, you’ll want to make sure you have all the information needed to make a decision right for you. Learn how best to set yourself up for passive income—and success.
The 1031 Exchange Dilemma
1031 exchange rules can be complex and you may feel overwhelmed by the strict timelines surrounding this traditional route. Both a classic 1031 exchange and a Delaware Statutory Trust are subject to IRS-dictated guidelines. However, many investors rush into a Delaware Statutory Trust 1031 exchange as a sort of “panic button” solution, as it allows for faster execution, expediting the process and enabling them to defer capital gains without the added pressure. Investors also sometimes pursue this route as a backup option in case an initial designated property falls through.
While there are certainly benefits to both, it’s important to explore the ins and outs of DSTs in order to better understand the logistics around control, profitability, and more. At CapFree Xchange, we’re here to ensure you feel informed and confident before you fully commit your hard-earned capital.
What Is a Delaware Statutory Trust (DST)?
Let’s start with the basics. A Delaware Statutory Trust is an investment method that allows fractional interests to be treated as replacement properties under Section 1031. These qualify as “like-kind” real estate, meeting eligibility requirements for deferred taxes.
But what does this mean exactly? DSTs allows multiple investors (up to 499) to have ownership in a property or multiple properties that are professionally managed, pooling money together and receiving a share of the income.
It’s important to note that unlike with a standard 1031 exchange, Delaware Statutory Trust 1031 exchange investors do not own the deed to any properties, but have what is known as a “beneficial interest” in the trust itself—something to keep in mind depending on your own priorities.
So, is this the right path for you? Many opt for this method as it allows for fractional ownership of institutional-grade assets that may be otherwise out of reach for the average individual investor (think offices, retail, and industrial buildings). If that’s something that interests you, Delaware Statutory Trust real estate may be the way to go. But if you’re not sold on it, read on to learn more about Delaware Statutory Trust pros and cons.
The “7 Deadly Sins”: IRS Restrictions on DSTs
Curious about the benefits of Delaware Statutory Trust for real estate investments? They have many—they’re reliable, passive, and can help with portfolio diversification. However, there are also many problems with Delaware Statutory Trusts, including restrictions placed on them by the IRS through Revenue Ruling 2004-86, commonly known as the “7 deadly sins”:
- No Term Renegotiations or New Loans: Terms are set and investors can’t make new financing agreements, in some cases limiting opportunities to refinance and earn more.
- No New Leases or Lease Negotiations: While the sponsor can create subleases, this comes with additional complications.
- No Additional Capital Contributions: Aside from routine maintenance, DSTs can’t be improved upon and investors can’t invest more capital.
- No Reinvesting of Proceeds: If a sale is made in a DST, the proceeds must be distributed directly to investors.
- Limits on Excess Reserves: Typically, DSTs can only maintain up to 3% of property value and this amount can’t be used for improvements. Excess reserves also must be given to investors.
- No Business Activities: DSTs can only collect rent and pay operating expenses.
- No Future Contributions: After the initial purchase, investors can’t invest more money into the trust.
While these rules can seem complex, when assessing Delaware Statutory Trust pros and cons, it’s important to focus on the practical implications and what they really mean for you. Once the trust is closed, you’re strictly prohibited from accepting future capital contributions, renegotiating debt, reinvesting proceeds, or entering into new leases.
To sum it up, if the properties in a DST run into financial trouble or the market shifts unexpectedly, your hands are essentially tied, potentially leading to asset foreclosure—and diminished returns. Keep Delaware Statutory Trust disadvantages top of mind before committing.
The Hidden Cost: Delaware Statutory Trust Fees & Loads
In addition to some of these restrictions, there are an array of fees involved in DSTs—many of them hidden in the fine print. To start, there is a “load,” which is an upfront cost investors pay when initially buying into the trust. Typically 10-15% of capital goes into things like acquisition costs, broker commissions (often 6-9%), and additional organizational fees.
This means investors start in a so-called hole. Your property must start making money quickly to break even on your initial investment—and start actually increasing your cash flow.
Risks of Investing in a Delaware Statutory Trust
Let’s put fees aside for a moment and talk about additional Delaware Statutory Trust risks. Value flexibility? A Delaware Statutory Trust 1031 exchange may not be right for you, as there’s no secondary market for these interests—you’re locked in for the full 5-10 years. You’ll have to essentially stay put until the DST is sold by the sponsor after the planned holding period as Delaware Statutory Trust administration is entirely in their hands.
This illiquidity limits your control and puts you at a higher risk, as you can’t vote on management, leasing, and most importantly, the sale. If you need your capital fast or if an emergency comes up, your options are limited.
The Alternative: Direct Title Security (DTS) With CapFree Xchange
A DST isn’t the only path you can take for a 1031 exchange—you have options. CapFree Xchange’s Direct Title Security (DTS) model makes the process simple, safe, and accessible. Through our triple net least structure, we lighten the load by removing the load, ensuring you can invest and relax, earning predictable income with no upfront costs, property taxes, or management hassle. You own the direct title to the property, while the BBB+ credit-rated tenant assumes responsibility for day-to-day costs.
Comparison: DST vs. CapFree Xchange
Still not sure which option is right for you? We’re comparing these investment vehicles, giving you a transparent side-by-side assessment.
| Features | Delaware Statutory Trust | CapFree Xchange’s Model |
| Ownership | Fractional beneficial interest | Direct title owner |
| Fees | High load amount | Zero expense |
| Control | Sponsor-controlled | Owner-controlled |
While there are Delaware Statutory Trust benefits for passive investors, you should always note the potential challenges and plan accordingly.
An Easier Way to Invest
Ready to make a 1031 exchange? It’s important to weigh your options. While DSTs can be a great path for some, their high fees and tight restrictions make them less than ideal options if you’re searching for security—and maximum gains.
Don’t settle for taking a passenger role in your own investments. Watch our product explainer and check out our website to get one step closer to relaxing with reliable income streams. Still have questions? Contact us anytime to learn more about this headache-free path.
FAQs: Delaware Statutory Trust Frequently Asked Questions
What is a Delaware Statutory Trust?
A Delaware statutory Trust (DST) is a real estate ownership structure. It qualifies as a 1031-eligible “like-kind” exchange that allows investors to own a share of property while a sponsor assumes management, deferring capital gains taxes and earning passive income.
How to form a Delaware Statutory Trust?
- Choose a sponsor (a professional real estate company who specializes in Delaware Statutory Trust administration)
- Have an attorney draft the Delaware Statutory Trust
- File the trust with the Delaware Secretary of State’s office
- Investors buy shares in the DST
- Acquire and operate the Delaware Statutory Trust real estate
How to invest in a Delaware Statutory Trust?
Ensure you are an accredited investor that meets SEC requirements, review a DST through a sponsor, decide on an amount to invest, complete paperwork and subscription documents, and place funds into the trust.
Are Delaware Statutory Trusts safe?
While DSTs aren’t fundamentally unsafe and any investment comes with uncertainty, they are not considered low-risk due to their illiquidity and variables like property quality, sponsor trustworthiness, fees, market conditions, and more.
Disclaimer: The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This presentation has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. CapFree Xchange, an approved distributor of the Appreciation Homes product and wholly owned subsidiary of Capview Holdings, encourages any person considering any action relating to real estate topics discussed herein to seek the advice of your financial, investment, tax and legal advisors.
