More investors are using a DST 1031 exchange than ever before. Delaware Statutory Trust sales passed $8.41 billion in 2025, up almost 49% from 2024 (AltsWire, citing Mountain Dell Consulting, 2026). That growth has carried into 2026. Sponsors raised about $5.5 billion through July, and the industry is on pace for a record near $10 billion (Bisnow, 2026).
The appeal is easy to see: A DST offers a passive, ready made replacement property for anyone going through a 1031 exchange and coming up on that 45-day identification timeline.
However, the setup has significant tradeoffs, and not every investor knows about them. Before signing, it helps to know what the trust can and cannot do, and what the investor gives up in exchange.
In this article, we’ll cover how a DST 1031 exchange works, why investors choose one, and what they give up compared to direct ownership.
We’ll also compare DSTs with owning 100% of an absolute NNN property. For a refresher on the basics, see our complete guide to 1031 exchanges.
Key Takeaways
- ▸A DST lets an investor buy a fractional, passive interest in institutional real estate that qualifies for a 1031 exchange.
- ▸It offers low minimums and speed.
- ▸In exchange, the investor gives up control over financing, leasing, and the sale date, and often pays an upfront load near 5%.
- ▸Direct ownership of an absolute NNN property keeps the passive income while returning control to the owner.
What Is a DST 1031 Exchange?
Put simply, a DST 1031 exchange uses a Delaware Statutory Trust as the replacement property instead of an “actual” commercial or residential property. The trust holds title to one or more properties, and investors buy beneficial interests in it. Under IRS Revenue Ruling 2004‑86, those interests count as direct interests in real estate. As a result, they qualify as like kind property, which goes to show that the definition is often broader than many investors think.
In practice, a sponsor buys the property, arranges the debt, and then sells interests to investors. A trustee runs the asset for the group. Investors get their share of the rent, the tax write offs, and the sale proceeds.
Most DSTs hold apartments, warehouses, medical offices, or net lease stores. Some hold a single building, while others hold a portfolio. In each case, though, the investor owns a slice of the trust, not the deed. In that way, it’s similar to a syndication.
How Does a DST 1031 Exchange Work?
The IRS gives investors 45 days to identify replacement property and 180 days to close (IRS, 2026). A qualified intermediary holds the sale proceeds in between, just like a typical 1031 exchange.
The steps usually look like this. First, the investor engages a qualified intermediary before selling their old property (IMPORTANT: if you don’t engage a qualified intermediary before selling, you cannot 1031 exchange). The intermediary holds the cash. Next, the investor identifies one or more DSTs within 45 days. Then the intermediary wires funds to the sponsor, and the investor receives beneficial interests.
Since the sponsor has already closed, the purchase can move fast. For that reason, many investors list a DST as a backup on their identification form. If a direct deal falls apart, the backup can still save the exchange.
Access does have limits, though. DSTs are private placements, so they are usually open only to accredited investors as defined by the SEC. On top of that, minimums often start around $100,000, although some sponsors accept less (Realized1031, 2026).
Why Investors Choose DSTs
DSTs solve a few problems at once, and their growth shows it. For many sellers, they are the simplest path through a tense exchange.
Passive income. The trustee handles the property, so investors usually collect rent checks without managing tenants or repairs.
Low minimums. A $100,000 entry point lets a smaller exchange reach assets that would otherwise be out of reach.
Diversification. Investors can split funds across several DSTs with different sponsors, states, and asset types.
Debt replacement. Sponsors often arrange nonrecourse loans in advance. That debt can help an investor replace the mortgage on the property they sold, which the IRS rules usually require to avoid a taxable gain.
Speed. Since the deal is already closed, the investor can usually fund within days rather than weeks.
These perks matter, most of all late in a 45 day window. Still, each one has a cost worth a close look.
The Tradeoffs: Fees, Control, and the “Seven Deadly Sins”
The biggest DST tradeoffs are cost and control. Upfront loads often run around 5% of the investment (Kiplinger, 2026). Hold periods usually run five to 10 years, and investors have little say over when the property sells.
The limits on control come straight from the tax rules. To keep its 1031 status, a DST must avoid seven prohibited activities, often called the “seven deadly sins.” The trustee cannot:
Prohibited activity 1. Accept new capital from investors after the offering closes.
Prohibited activity 2. Refinance or take on new debt.
Prohibited activity 3. Reinvest sale proceeds.
Prohibited activity 4. Make major upgrades beyond routine repairs.
Prohibited activity 5. Invest cash reserves in anything but short term debt.
Prohibited activity 6. Hold back cash flow instead of distributing it (beyond reasonable reserves).
Prohibited activity 7. Renegotiate leases or sign new ones, except in narrow cases like a tenant bankruptcy.
These rules protect the tax status, but they also tie the trustee’s hands. For example, if a big tenant leaves, the trust may have few tools to respond.
Selling early is another concern. DST interests usually have no public market, so selling early can be difficult or impossible. The sponsor decides when to sell, and that timing may not match the investor’s plans for the next exchange.
Some DSTs also end in a “721 exchange.” This swaps the investor’s stake for units in a partnership tied to a REIT. That route can make the exit simple. On the other hand, it usually ends the ability to do another 1031 exchange with those assets. These pooled deals share some drawbacks with syndications, which we cover in our look at real estate syndications.
DST 1031 Exchange vs. 100% Direct NNN Ownership
The main alternative to a DST 1031 exchange is direct ownership of an absolute NNN property. In an absolute NNN lease, the tenant often pays the taxes, insurance, and maintenance. As a result, the owner keeps landlord duties low while still holding the deed and every decision that comes with it.
Here is how the two structures usually compare.
Control. A DST investor relies on the sponsor and trustee. A direct owner decides when to refinance, when to sell, and when to start the next exchange.
Financing. A DST’s debt is fixed at the offering and cannot be refinanced. A direct owner can refinance to pull out cash or lock in a lower rate. Custom Capital’s buyers use a programmatic institutional lending facility. It gives individual buyers the terms that large institutions often get.
Costs. DST loads come out of the investor’s cash at the start. Direct deals carry their own closing costs, but the owner can see and negotiate each line.
Tax planning. Both setups pass tax write offs through to the owner. With direct ownership, though, the owner can commission a cost segregation study and decide how to use 100% bonus depreciation on their own timeline.
Minimums. DSTs win here. Direct deals usually need more equity, though a loan can stretch it further.
For investors with enough equity, direct ownership often keeps most of the passive appeal without giving up control. We explain the case in more detail in why NNN properties make ideal 1031 replacement property.
A Worked Example: $1.5 Million in Exchange Proceeds
Numbers make the tradeoffs clear. Consider an investor who sells a rental building and has $1.5 million to place in a 1031 exchange. For simplicity, we’ll assume both options carry about 50% leverage.
Illustrative scenario:
The DST route. The investor buys $1.5 million of interests across two DSTs. If the load runs near 5%, roughly $75,000 goes to offering costs rather than real estate. The sponsor’s nonrecourse debt helps replace the old mortgage. After that, the investor collects distributions and waits for the sponsor to sell, likely within five to 10 years.
The direct route. The investor uses the same $1.5 million as a down payment on a $3 million absolute NNN property. The tenant covers taxes, insurance, and maintenance under the lease. Meanwhile, the investor owns 100% of the asset and controls the loan, the cost segregation decision, and the timing of the next sale.
Neither path is right for every buyer, and both can work well. The DST is simpler and spreads risk more widely. The direct purchase, by contrast, concentrates risk in one tenant, so tenant credit and lease terms deserve close review.
This example is illustrative only. It does not reflect any real offering, and actual fees, debt, and returns vary.
How to Decide Which 1031 Replacement Fits
The right choice depends on goals, timing, and equity. A few questions can help frame it.
How much control matters? Investors who want to choose their refinance and exit dates usually lean toward direct ownership.
How large is the exchange? Smaller exchanges may fit DSTs better. Larger ones often have enough equity for a single property, especially with institutional financing.
How close is the deadline? If the 45 day window is nearly closed, a DST can serve as a practical backup.
What happens next? Investors who plan to keep exchanging for decades should consider whether a sponsor’s sale date or a 721 conversion fits that plan.
How much spread of risk is needed? Some investors prefer to spread risk across several sponsors. Others prefer one strong tenant with a long lease.
A tax advisor and a qualified intermediary should review any plan before it closes.
The Bottom Line: Is a DST 1031 Exchange Right for You?
A DST 1031 exchange can be a helpful tool. It offers low minimums, fast closings, and passive income. It can also save an exchange that is running out of time. Still, those perks come with upfront loads, fixed debt, few ways to sell early, and little say over the exit.
For investors with enough equity, owning 100% of an absolute NNN property often keeps the passive income while restoring control over financing, taxes, and timing. Custom Capital has acquired more than $460 million in real estate across 125+ closed deals, and our team sources and vets off market NNN properties for 1031 buyers.
Ultimately, the decision belongs to the investor. If you are weighing a DST against direct ownership, we’d be glad to walk through the numbers with you on a call.
For more on the exchange rules themselves, our 1031 exchange guide covers each step in detail.
Weighing a DST Against Direct Ownership?
Our team can walk through the numbers on a DST and on owning 100% of an absolute NNN property, so the choice fits your exchange timeline and goals.
For accredited investors. This is not tax, legal, or investment advice.
Frequently Asked Questions
Does a DST qualify for a 1031 exchange?
Yes. Under IRS Revenue Ruling 2004‑86, a beneficial interest in a properly structured DST is treated as a direct interest in real estate. As a result, it usually qualifies as like kind replacement property. The trust must follow strict operating limits to keep that status.
What is the minimum investment in a DST?
Minimums often start around $100,000, although some sponsors accept less. DSTs are private placements, so they are usually limited to accredited investors. Each offering sets its own terms in its private placement memorandum.
How much do DSTs cost?
Upfront loads often run around 5% of the investment, according to Kiplinger in 2026. These costs often cover commissions, deal costs, and sponsor fees. Yearly fees may also apply, so investors should read the deal papers closely.
Can I sell a DST interest early?
Selling early is usually difficult. DST interests have no public market, and most offerings expect a hold period of five to 10 years. Investors should plan to hold until the sponsor sells the property.
Is a DST better than owning an NNN property directly?
It depends on the investor’s goals. DSTs offer low minimums and diversification, while direct ownership offers full control over financing, taxes, and exit timing. Investors with enough equity often prefer direct ownership of an absolute NNN property for that control.
This article is for educational purposes only and is not tax, legal, or investment advice. Consult a qualified tax advisor before making any 1031 exchange decision.
