BREAKWATER RESOURCES

Delaware Statuary Trusts

Traditional
DSTs

Delaware Statutory Trusts

The Ideal 1031 Replacement Property Alternative

While some investors prefer to identify replacement property through traditional, local real estate channels, others seek broader diversification, geographic reach, and a shift from active management to passive ownership. For those investors, Delaware Statutory Trusts (DSTs) offer an effective solution.

DSTs allow investors to acquire fractional interests in institutional-quality, professionally managed, income-producing real estate, providing diversification and reduced operational responsibility—making them an attractive option for those seeking long-term stability and simplicity.

DST OWNERSHIP EXAMPLE

When you invest l031 money into a DST, you take on partial ownership of the equity and debt. These sample clients’ investments provide tangible examples of what your DST could  potentially look like. 

investor spotlight

Smith Family

Sold Beach House.
Exchanged Into DST (10% Owner)

Equity

$800,000

Debt

$1,200,000

Debt

$1,200,000

Main St. Apartments, DST

$20,000,000 Equity Offered / 7.0% Cash Flow / 60% LTV

investor spotlight

David Williams

Sold Industrial Building.
Exchanged Into DST (5% Owner)

Equity

$1,200,000

Debt

$1,800,000

Debt

$3,000,000

DST 101

What is a Delaware Statutory Trust?
A Delaware Statutory Trust, or DST, is a legally recognized real estate investment trust in which investors can purchase ownership interest. Investors who own fractional ownership are known as beneficiaries of the trust. DSTs, unlike many other co-ownership real estate investment structures, are 1031-eligible. For many exchangers, DSTs are a better option than a traditional “whole property” exchange, where the investor sources and acquires 100% of a property (a “whole property”) and actively manages that property.
Timing Consideration of a 1031 Exchange
Timing is one of the most challenging aspects of a 1031 exchange. The taxpayer has only 45 days from the sale of their relinquished property to identify potential replacement properties, and up to 180 days to close the acquisition of one or more replacement properties. In addition to the time constraints, other factors can make exchanges very difficult to accomplish, including:

• complexity of the tax rules
• limited supply of replacement properties
• debt requirements
DSTs Solve These Challenges
DSTs are structured to satisfy the like-kind requirement and provide the same tax benefits as direct ownership of real estate. Combined with impressive returns generated by skillful and experienced sponsors, the simplified investment process makes DSTs a superior option for many exchangers.

These properties have already been acquired by the DST; if the DST is leveraged, the loan is in place with no personal liability to the investors; and all due diligence has been completed, with investors given electronic access to documents and reports (title, survey, appraisal, environmental report, property condition report, roof report, etc.).
Benefitting Your Heirs
You can continue to defer capital gains taxes using the 1031 exchange process until you pass assets onto your heirs. DST shares can be evenly divided and passed on to multiple heirs, greatly simplifying investors’ estate planning.When real property is passed to your heirs, whether held directly or through a DST, the basis by which the capital gains are determined steps up to the current market value at the time of inheritance. After your heirs inherit the property, they may sell it for its current value and bypass any capital gains you amassed within your lifetime.
Delaware Statutory Trust Investment Sponsors​
You can continue to defer capital gains taxes using the 1031 exchange process until you pass assets onto your heirs. DST shares can be evenly divided and passed on to multiple heirs, greatly simplifying investors’ estate planning.When real property is passed to your heirs, whether held directly or through a DST, the basis by which the capital gains are determined steps up to the current market value at the time of inheritance. After your heirs inherit the property, they may sell it for its current value and bypass any capital gains you amassed within your lifetime.

Delaware Statutory trust Investment Sponsors

How DSTs Simplify
the Exchange Process

For many exchangers, DSTs offer a more efficient alternative to acquiring and managing a single, wholly owned property. Instead of sourcing, financing, and operating a property themselves, investors can:

  • Reinvest exchange proceeds quickly
  • Diversify across properties & asset types
  • Eliminate active management responsibilities

By eliminating sourcing risk, financing uncertainty, and management responsibilities, DSTs allow investors to focus on tax deferral, diversification, and execution certainty.

  • Properties are already acquired by the trust
  • Financing is in place, with no personal liability to investors
  • Due diligence is completed upfront
  • Investors receive access to all key documentation

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Who DSTs Are
Designed For

DSTs were created specifically to serve investors who prioritize passive income, capital preservation, diversification, and tax deferral without the operational burden of direct ownership.

They all have specific characteristics associated with them:

 

Low Leverage

Most DSTs employ an LTV between 0% to 50%. This is always long-term fixed financing, no adjustable rates

Fully Stabilized

The property must meet certain occupancy thresholds before available to investors.

Less Speculative Investment Strategy

Sponsors cannot employ high-speculation tactics like ground-up developments or deep value-adds.

Newer Properties

Since DSTs cannot deploy significant capital expenditures to create value, most properties are either new/recent builds.

No Cash Calls/Reserve Accounts

DSTs cannot ask investors for more money at any point in time. Therefore, each DST begins with ample reserves to account for any unforeseen circumstances or shortfalls in operating income.

Pros and Cons of DSTs

No Management Responsibilities

The DST is the single owner and agile decision maker on behalf of investors.

INSTITUTIONAL QUALITY PROPERTY

DSTs allow investors to acquire partial ownership in properties that otherwise would be out-of-reach. 

LIMITED PERSONAL LIABILITY

Loans are nonrecourse to the investor. The DST is the sole borrower. 

Diversification

Investors can divide their investment among multiple DSTs, which may provide for a more diversified real estate portfolio across geography and property types. 

SWAP TIL YOU DROP

The DST structure allows the investor to continue to exchange real properties over and over again until the investor’s death. 

POTENTIAL FOR QUICK CLOSE

Can close in as little as 3-5 business days with no interaction with a bank and possibly continue your cash flow uninterrupted as soon as the following month. 

Backup plan

A DST can act as a prudent backup if a direct property acquisition falls through.

CERTAINTY OF MEETING 1031 DEADLINES

As long as there is available equity, exchangers can make reservations in a given DST until their sale closes. Should they change their mind or if their sale doesn’t close, the investor is not obligated to the sponsor, nor will they be charged any penalties.

invest "leftover' proceeds

Some investors have excess proceeds in a 1031 exchange. Investing those funds into a DST can help avoid taxable boot.

AGGRESIVE INVESTORS

Not for those seeking outsized returns in a short amount of time or are pursuing aggressive growth strategies (developing or deep value adds). 

Lack of Control

Not for investors who need 100% control.

illiquid

Interests of a DST should be considered illiquid just like any other real estate, especially if you invest via a 1031 exchange.

graphic2

DST Diversification

Diversification is one of the most effective ways to manage risk in real estate investing. Rather than concentrating capital in a single property, investors can reduce exposure by allocating across multiple assets with varying risk profiles.

DSTs allow diversification across:

  • Asset Classes
  • Geographic Markets
  • Tenants
  • Sponsors

Diversifying by sponsor is especially important, as it helps avoid reliance on a single management team or operating strategy. When structured thoughtfully, a diversified DST portfolio can help mitigate risks associated with tenant concentration, market cycles, and asset-specific performance.

DST Asset Classes

Multi-Family DST

Self-Storage

Senior Housing

Healthcare

Industrial

Corporate-Leased Triple Net

Additional DST Benefits

Ability to move quickly
The biggest limitation to those trying to conduct a traditional 1031 exchange is generally identifying a suitable like-kind property to purchase within tight IRS timelines. This is particularly true in today’s competitive real estate environment, where there are fewer “deals” to be had. Investors still need to conduct thorough due diligence on every prospective opportunity, and finding a property that meets their investment criteria within the allotted time can oftentimes be quite challenging. DSTs offer real estate that has already been thoroughly vetted and is ready for investment. This allows sellers to move quickly while still taking advantage of the tax benefits associated with doing a 1031 exchange.
More inventory to consider
Many investors seeking to do a 1031 exchange find themselves pressured into trading up into a property that they might not otherwise purchase if it were not for the 1031-time constraints. Investing in a DST provides access to greater inventory including real estate that has been carefully vetted by some of the industry’s leading players. This can help reduce the likelihood of making a “bad” investment for those who might otherwise make a snap decision given timeline pressures.
No active management required
Those who trade-up into a higher value asset with a traditional 1031 exchange still take on the burden of actively managing the real estate. Instead, those who invest the proceeds of their sale into a DST will hand over management responsibilities to the sponsor of the DST, who oversees the real estate holdings on the investors’ behalf. This allows an investor to cash out of a property they actively own and manage into real estate that is 100% passive in nature.
Easier to finance and no personal liability for DST debt
Unlike TICs, those who invest in DSTs are not liable for any debt associated with the property. Instead, the sponsor is solely responsible to lenders. Real estate held in DSTs is also easier to finance because the lender is only underwriting the sponsor, usually a large and reputable institutional real estate company with a verified track record, and not each individual investor, as is the case with TICs.
Access to institutional-quality assets:
Those who invest in property directly are often limited to assets of a certain caliber simply due to the costs and financing associated with investing in higher-quality real estate. Those looking to invest in institutional-quality assets can do so by invest through a DST given its fractional ownership model. Through a DST, an individual investor can own a small share of a high-quality asset that would otherwise have high barriers to entry.
The Assurance Your Exchang Will Close
By identifying a DST as one of your replacement properties, you may significantly reduce the risk of blowing your exchange. There are a myriad of reasons why the like-kind property purchase you are making may not close. Since the property held by a DST is typically acquired prior to offering interests to investors, in the event your purchase does not go through, you can invest your sale proceeds into a DST – deferring your taxable gain and potentially generating predictable income. DST investments are generally admitted into the Trust within 24-48 hours, helping to ensure a prompt closing.

Breakwater Can Handle the Debt for You

The DST seeks to secure non-recourse financing at favorable terms

The DST sponsor leverages their strong lender relationships to attempt to obtain financing terms investors would most likely not be able to obtain on their own.

The DST assigns the pro-rata share of debt to the investor

The DST Assigns The Benefits Of The Debt But Retains The Obligations. The Debt Is Non–Recourse To The Investor. The Investor Does Not Need To Qualify For The Debt Personally.

Investors can relax and know the debt is handled!

Investors fulfill their debt requirements without the headache associated with qualifying for and being liable for the debt obligations.

Putting it all Together

A Hypothetical Client Allocation

One of the most compelling benefits of utilizing Delaware Statutory Trusts within a 1031 exchange is the ability to meaningfully diversify. In the example below, an investor transitions from a single-family rental into multiple DST offerings.

While the investor maintains exposure to real estate as an asset class, the risk profile becomes more balanced through diversification across multiple properties and tenants, varied geographic markets, and a mix of asset types and sponsors. This approach can reduce concentration risk while providing broader exposure to institutional-quality real estate.

Case Studies

Strategic Results in Action

We don’t just offer advice; we architect solutions. Explore our real-world case studies to see how we navigate complex tax laws and market volatility to protect and grow our clients’ wealth.