“Beyond the Classroom: Why Investors Are Studying DSTs This Fall”

Recent­ly we pub­lished a three-part edu­ca­tion­al series called “Sharp­en­ing Your Port­fo­lio IQ: The New Semes­ter of Alter­na­tive Invest­ment Strate­gies”.  At a recent real estate and CPA con­fer­ence there were con­tin­ued con­cerns and inter­est about the sequence of events to prop­er­ly posi­tion assets for a 1031 tax deferred exchange.

Octo­ber 20, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ists & DST Advi­sor
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Investors are also tak­ing a deep­er dive into Delaware Statu­to­ry Trust (DSTs). There was a tran­si­tion from con­fu­sion, con­cern, cau­tion and then con­fi­dence in uti­liz­ing a §1031 tax deferred exchange with a DST.

It is appro­pri­ate to re-engage and review as we enter an ener­gized time of the year. As we enter the fourth quar­ter of 2025, investors may be repo­si­tion­ing their real estate and invest­ment hold­ings to make a move pri­or to year end or get­ting ready for 2026 (already).

The con­fu­sion was shared as to how Delaware Statu­to­ry Trusts (DSTs) qual­i­fy as replace­ment prop­er­ty for §1031 tax-deferred exchanges. As a refresh­er, this is per­mit­ted due to IRS Rev­enue Rul­ing 2004–86. The rul­ing in 2004 estab­lished per­mit­ting frac­tion­al own­er­ship in a DST being con­sid­ered direct own­er­ship of real estate. Part­ner­ship inter­est would not qual­i­fy.

Why DSTs Qual­i­fy

1. IRS Guid­ance
   • Rev­enue Rul­ing 2004–86 con­firms that a ben­e­fi­cial inter­est in a prop­er­ly struc­tured DST rep­re­sents direct own­er­ship of real estate.
   • Unlike part­ner­ships or LLCs, DST investors are treat­ed as own­ing an undi­vid­ed inter­est in the under­ly­ing real prop­er­ty.
2. Like-Kind Prop­er­ty Require­ment
   • §1031 exchanges require the relin­quished prop­er­ty and replace­ment prop­er­ty to be of “like-kind.”
   • DST inter­ests meet this def­i­n­i­tion since they are tied to actu­al real estate assets.
3. Com­pli­ance with IRS Restric­tions (non­com­pli­ance is ref­er­enced as the Sev­en Dead­ly Sins)
   DST trustees and spon­sors must adhere to strict lim­i­ta­tions to main­tain com­pli­ance:
   • No new cap­i­tal con­tri­bu­tions after the offer­ing is closed.
   • No refi­nanc­ing after the ini­tial loan is placed.
   • No rein­vest­ment of sale pro­ceeds from dis­posed prop­er­ty.
   • Lim­it­ed abil­i­ty to make struc­tur­al changes, rene­go­ti­ate leas­es, or enter new busi­ness ven­tures.
   • Only nor­mal repair, main­te­nance, and minor non-struc­tur­al improve­ments are per­mit­ted.

§1031 Exchange Process Using a DST

1. Sell the relin­quished prop­er­ty – pro­ceeds are held by a Qual­i­fied Inter­me­di­ary (QI) to avoid con­struc­tive receipt.
2. Iden­ti­fy replace­ment prop­er­ty (DSTs) – with­in 45 days of the sale of the relin­quished prop­er­ty.
3. Close on the DST invest­ment – with­in a total of 180 days of the sale of the relin­quished prop­er­ty.
4. Own­er­ship via ben­e­fi­cial inter­est – investor receives pro-rata share of income and appre­ci­a­tion, but no active man­age­ment respon­si­bil­i­ties.

Advan­tages of Using DSTs in §1031 Exchanges

• Fast clos­ing, use­ful for meet­ing tight IRS dead­lines. DSTs are prepack­aged and ready to close in a short peri­od of time.
• Access to insti­tu­tion­al-qual­i­ty real estate (mul­ti­fam­i­ly, indus­tri­al, retail, med­ical office, self-stor­age, stu­dent hous­ing, life sci­ence, and even land).
• Pas­sive income with pro­fes­sion­al man­age­ment.
• Abil­i­ty to diver­si­fy by invest­ing in mul­ti­ple DSTs with small­er min­i­mums. A $500,000 exchange may be real­lo­cat­ed into sev­er­al DSTs. There would be added due dili­gence as well as addi­tion­al paper­work. This may pro­vide a lev­el of diver­si­fi­ca­tion. Diver­si­fi­ca­tion does not elim­i­nate risk but seeks to min­i­mize risk.

What to Look for in a Good DST Pro­fes­sor (AKA Advi­sor)

When search­ing for an advi­sor you may approach the selec­tion process by select­ing an edu­ca­tion­al part­ner. Investors will go through an edu­ca­tion­al process and should seek an advi­sor who has spe­cif­ic DST / §1031 exchange expe­ri­ence. They should know the life­cy­cle, risks, and legal paper­work, spon­sor rep­u­ta­tions, fees, etc. Advi­sors who have inter­faced with CPAs may also be able to assist since many CPAs may not deal with §1031 exchanges and DSTs on a reg­u­lar basis.

A real estate bro­ker typ­i­cal­ly is not licensed appro­pri­ate­ly. Look for Reg­is­tered Invest­ment Advi­sors (RIAs), broker-dealers, or finan­cial pro­fes­sion­als who can legal­ly sell DST offer­ings. DST spon­sors typ­i­cal­ly dis­trib­ute their offer­ings through these chan­nels.

An advi­sor should be select­ed who has a track record for a num­ber of trans­ac­tions com­plet­ed or deals done, who is engaged in the selec­tion process and who under­stands DSTs need­ed to bal­ance debt require­ments as well as poten­tial diver­si­fi­ca­tion. Just as impor­tant is being trans­par­ent regard­ing fees and risks.  Advi­sors who oper­ate in a Fidu­cia­ry capac­i­ty or with aligned incen­tives is an advan­tage. Make sure there are no con­flicts of inter­est (e.g. the advi­sor is also spon­sor­ing the DST or gets paid extra for pro­mot­ing cer­tain ones).

Com­mu­ni­ca­tion actu­al­ly is a two-way sit­u­a­tion. The advi­sor needs to be respon­sive, com­mu­nica­tive, and edu­ca­tion­al.  Advi­sors should take time to under­stand your goals, walk you through the pros/cons, help with due dili­gence. The investor needs to under­stand time con­straints, espe­cial­ly with the 45-day iden­ti­fi­ca­tion peri­od and return­ing doc­u­men­ta­tion. This is espe­cial­ly impor­tant when investors con­tact us well with­in their 45-day iden­ti­fi­ca­tion peri­od.

Advi­sors who adopt an edu­ca­tion­al atti­tude first and fore­most may pro­vide the most effec­tive and effi­cient solu­tion for the investor. Investors who begin their edu­ca­tion­al process with the right advi­sors will be in the best finan­cial posi­tion as well as meet­ing tim­ing con­straints if uti­liz­ing a 1031 exchange.

As always con­tact us for more infor­ma­tion and a com­pli­men­ta­ry con­sul­ta­tion.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

Alter­na­tive invest­ments and DSTs are not for all investors.  The acqui­si­tion of a cer­tain alter­na­tive invest­ments includ­ing DSTs is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your §1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC §1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.