Cer­tain prop­er­ly struc­tured Delaware Statu­to­ry Trust inter­ests may poten­tial­ly qual­i­fy as replace­ment real prop­er­ty in a Sec­tion 1031 exchange.

IRS Rev­enue Rul­ing 2004–86 con­clud­ed that, under the spe­cif­ic trust struc­ture described in the rul­ing, each ben­e­fi­cial own­er was treat­ed as own­ing a pro­por­tion­ate inter­est in the under­ly­ing rental real estate for fed­er­al tax pur­pos­es. Under those facts, an exchange of real prop­er­ty for an inter­est in the DST could qual­i­fy when the oth­er Sec­tion 1031 require­ments were sat­is­fied.

Why Do Investors Consider DSTs?

• Pas­sive real estate own­er­ship
• Pro­fes­sion­al man­age­ment
• Frac­tion­al invest­ment siz­ing
• Access to larg­er com­mer­cial prop­er­ties
• Poten­tial diver­si­fi­ca­tion among sev­er­al prop­er­ties
• Anoth­er replace­ment-prop­er­ty alter­na­tive dur­ing the 45-day peri­od

DSTs also involve sig­nif­i­cant risks, includ­ing illiq­uid­i­ty, lim­it­ed con­trol, spon­sor risk, real estate risk, financ­ing risk, fees, and pos­si­ble loss of prin­ci­pal.

Key Point: A DST should be select­ed because the invest­ment makes sense — not sim­ply because the 45-day dead­line is approach­ing.

Ref­er­ence Sources

• IRS Rev­enue Rul­ing 2004–86

Impor­tant: This mate­r­i­al is for edu­ca­tion­al pur­pos­es only and is not tax, legal, account­ing, or invest­ment advice. Sec­tion 1031 out­comes depend on the tax­pay­er’s facts and com­pli­ance with applic­a­ble require­ments.