What is a Delaware Statutory Trust?

The Delaware Statutory Trust, often called a DST for short, is classified as a trust under the laws of the state of Delaware. The Delaware Statutory Trust is also known as a Delaware Business Trust.  The Delaware Statutory Trust is considered to be an investment trust that will be classified as a trust for federal tax purposes.  Therefore, DSTs is classified as a “pass-thru” entity and a “disregarded entity” so that any and all income tax consequences will “pass-thru” to the investor’s individual income tax return.

Trustee Holds Legal Title to Investment Real Estate

The individual investors no longer hold fee simple title, commonly referred to as legal title, to the rental or investment real estate like they did pursuant to the Tenant-In-Common or TIC investment structure.  Individual investors will now instead purchase a beneficial interest in a Delaware Statutory Trust or DST, which will qualify as a purchase of a real estate interest for income tax purposes.  They are now considered a beneficiary of the Delaware Statutory Trust of DST. Legal title to the investment property is now held in the name of the Trustee of the Delaware Statutory Trust.

Delaware Statutory Trust Satisfies 1031 Exchange Requirements

Buying or selling a beneficial interest in a Delaware Statutory Trust or DST qualifies for 1031 Exchange treatment. Investors can sell their existing rental property or investment real estate and then 1031 Exchange into a beneficial interest in a Delaware Statutory Trusts or DSTs. The investor can later sell the beneficial interest in the Delaware Statutory Trust or DST and then 1031 Exchange again into another Delaware Statutory Trust or into any other rental or investment property.

IRS Issues Revenue Ruling 2004-86

The IRS validated the use of Delaware Statutory Trusts for 1031 Exchange use when they issued Rev. Rul. 2004-86.

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