There are many benefits of owning commercial real estate. The asset class provides income and appreciation potential, competitive risk-adjusted returns, tax-efficient cash flow and the ability to use leverage. The main drawback for investors is that private, active ownership of real estate is management intensive.
Private commercial real estate continued to show positive property-level performance in 1Q 2026, with the NCREIF Property Index Expanded posting a 1.23% total return, including 1.15% income return and 0.08% appreciation. For investors evaluating real estate investments, that reinforces why many continue to look for tax-efficient, professionally managed real estate structures. Source: NCREIF Index Returns
At some point in their investment journey, these active owners will progress out of the accumulation and growth phase. They may be approaching retirement and are seeking to reap the benefits of their investments without all the work, focusing more on capital preservation and income. Converting from active to passive ownership is possible by exchanging invested property into a 1031 exchange and using a DST, or Delaware Statutory Trust.
The Investor Journey
What Is a DST, and How Does It Work?
A 1031 exchange allows investors to defer capital gains taxes on the sale of a real estate investment property. They do this by “exchanging up” into other—usually higher-value—properties. In completing a 1031 exchange, an owner exchanges the sale proceeds from their relinquished property into “like-kind” property. This simply means, among other criteria, that both assets must be considered real property held for productive use in a business or for investment. Source: IRS — Like-kind exchanges: Real estate tax tips
2026 update: Under current IRS guidance, replacement property in a deferred like-kind exchange must generally be identified within 45 days after transfer of the relinquished property and received within 180 days or by the due date of the taxpayer’s return, including extensions, whichever is earlier.
Delaware Statutory Trust, or DST, investments allow owners of real estate investments to pool their capital. Then, they exchange it for institutional assets with professional management. For example, an investor owns a property worth $500,000. By employing a 1031 exchange, they can convert that ownership to another property worth $500,000. But by employing a DST, they can roll their investment into a property or properties worth much more. Even better, the DST provides a passive ownership structure.
A Delaware Statutory Trust qualifies as “like-kind” for the purposes of a 1031 exchange. According to IRS Revenue Ruling 2004-86, owners of real property can exchange their assets, called the relinquished property, for part ownership in real property, called the replacement property. Revenue Ruling 2004-86 further confirms that, when a DST is properly structured as an investment trust, beneficial owners are treated as owning an undivided fractional interest in the underlying real property for federal tax purposes.
Key Benefits of DSTs for Investors
- Tax deferral. DST investors receive the same tax benefits as if they had completed their own 1031 exchange. That means they can fully defer all taxes due on the sale of the relinquished property. Federal capital gains taxes, state income taxes and depreciation recapture are all deferred. As well, the basis from the original property is rolled over.
- Passive ownership. Most real estate investors utilize a DST to eliminate active management—the three Ts of toilets, tenants and trash. The DST transfers all management responsibility to the sponsor and gives the client all the benefits of ownership.
- Ability to exchange “up.” Investors acquire a fractional interest in a trust that manages a larger or institutional-quality asset. It’s not simply a “like-kind” exchange of a similar property.
- Professional management. The replacement property is managed through the DST. So, investors no longer need to directly manage a property and can spend more time doing what they love.
- Passive income and simplified estate planning. Landlords exchange day-to-day property management for the benefits of a passive, monthly income stream. And beneficiaries inherit interest in a security, rather than a property, through an estate or trust. If they decide to liquidate the real estate, there are minimal tax implications.
- Matching debt and equity. Investors must replace the full value of relinquished real estate. It can be difficult to find assets that directly match the proceeds and to get financing on the new property. A DST is typically structured with non-recourse debt. So, the investor assumes the leverage and can invest as much equity as they need for the exchange.
2026 update: These benefits remain especially relevant for investors transitioning real estate investments from active ownership into passive structures, particularly as institutional-quality private real estate posted positive first-quarter 2026 returns.
Before You Invest: Limitations to DSTs
Owning tangible property is more complex than owning a share of stock. DST investments come with certain risks and limitations, and investors should understand these key points before proceeding.
- Lack of liquidity. Owning real estate means owning an illiquid asset. A DST interest is highly illiquid and can’t be converted into cash. For this and other reasons, investors in DST investments must be accredited investors.
- 2026 update: The SEC currently defines individual accredited investors to include those with net worth over $1 million excluding a primary residence, income over $200,000 individually or $300,000 with spouse or partner in each of the prior two years with a reasonable expectation of the same in the current year, and certain holders of Series 7, 65, or 82 licenses.
- Lack of management control. Management is truly passive. DST sponsors professionally manage the asset. That means investors do not have direct decision-making authority.
The Seven Deadly Sins of DST Investing
DSTs must operate according to seven key criteria in IRS guidelines. These have become known as the “seven deadly sins” among those who employ this strategy to defer capital gains. Investors receive an ownership percentage but relinquish voting and operational management privileges when they invest in a DST. The regulations, described below, were put in place to ensure the DST meets the IRS’ “like-kind” requirements.
- No additional equity contributions: Investors make a single equity contribution upon formation of the DST. Since capital calls are not allowed, all future expenditures must be capitalized upon formation.
- No refinancing of debt: Mortgages placed on the property cannot be refinanced.
- No reinvesting of sale proceeds: Any proceeds earned by a DST must be distributed to investors. It can’t be reinvested by the trustee.
- Limits on capital expenditures: Normal repair and maintenance of the asset, among other things, are allowed. But unnecessary upgrades or other activities that could put investor money at risk are not.
- Limits on cash investments: DST sponsors can only invest cash in short-term debt or another vehicle—nothing speculative—until it’s time to distribute to investors.
- Cash distributions: The DST is required to distribute earnings and proceeds to investors within the agreed distribution date.
- No new leases or renegotiations: Most DSTs use a master lease structure. This means the master tenant negotiates existing leases and enters new ones. This keeps the trustee from renegotiating a lease that could change the terms of the DST investment.
Why Invest in a DST Through Cochran Capital?
Delaware Statutory Trusts (DSTs) allow accredited investors to own fractional interests in institutional-quality commercial real estate while potentially deferring capital gains taxes through a 1031 exchange. Through Cochran Capital, investors gain access to a carefully curated selection of DST offerings across multiple asset classes and sponsors, helping them identify solutions aligned with their investment objectives, risk tolerance, and tax-planning needs.
Access to Institutional-Quality Real Estate
DST investments provide access to professionally managed commercial properties that may otherwise be difficult for individual investors to acquire directly. These assets can include multifamily communities, industrial facilities, medical office buildings, self-storage properties, net-leased retail, and other income-producing real estate.
Diversification Across Property Types and Markets
Unlike direct property ownership, DST investors can allocate capital across multiple properties, geographic regions, and asset classes. This diversification may help reduce concentration risk while providing exposure to different real estate sectors and economic drivers.
Independent Due Diligence
Cochran Capital evaluates DST opportunities from a variety of sponsors, focusing on property fundamentals, market conditions, sponsor experience, debt structure, and investment objectives. This disciplined review process helps investors make informed decisions when selecting replacement property options.
Simplified 1031 Exchange Solutions
Identifying suitable replacement property within the IRS 45-day identification period can be challenging. DST offerings are generally pre-acquired and structured before being made available to investors, allowing exchange participants to meet critical timelines more efficiently.
Potential Tax Deferral Benefits
DST interests qualify as replacement property under IRS guidelines for 1031 exchanges. Investors may defer capital gains taxes, depreciation recapture taxes, and certain state taxes by reinvesting proceeds from the sale of investment real estate into eligible DST offerings.
Passive Ownership
DST investors receive the benefits of professional asset management without the day-to-day responsibilities associated with property ownership. Property operations, leasing, financing, and management decisions are handled by experienced sponsors and management teams.
Debt Replacement Opportunities
Many DST offerings include pre-arranged financing, which may help investors satisfy both equity and debt replacement requirements often associated with 1031 exchanges.
Personalized Guidance
Every investor’s situation is unique. Cochran Capital works with investors and their professional advisors to evaluate available DST opportunities and identify solutions designed to support long-term investment and tax-planning goals.
2026 update: For investors reassessing real estate investments in today’s market, DSTs remain a relevant option when the goal is to combine tax deferral, professional management, and passive income with access to larger assets.
Frequently Asked Questions
What is a DST in a 1031 exchange?
A Delaware Statutory Trust (DST) is a legal trust structure that can hold title to real estate. Under IRS Revenue Ruling 2004-86, a properly structured DST may allow beneficial owners to be treated as owning fractional interests in the underlying real property for federal tax purposes, which is why DST interests can qualify as replacement property in a 1031 exchange.
What are the 45-day and 180-day deadlines for a 1031 exchange?
For a deferred like-kind exchange, the IRS says replacement property must generally be identified within 45 days after the relinquished property is transferred and received within 180 days or by the due date of the tax return, including extensions, whichever is earlier.
Who can invest in a DST?
DST offerings are commonly limited to accredited investors. As of 2026, the SEC states that individuals may qualify through $1 million net worth excluding a primary residence, $200,000 individual income, $300,000 joint income, or certain professional securities licenses.
Are DSTs a good fit for passive real estate investments?
DSTs can be attractive for passive real estate investments when an investor wants to move from active property management to a professionally managed structure with potential tax deferral and passive income. However, they also come with important tradeoffs, including illiquidity, limited control, and structural restrictions under IRS guidelines.
