The Short Version
A Delaware statutory trust, or DST, is a sponsor-assembled trust that owns income property; investors hold fractional interests, and under IRS Revenue Ruling 2004-86 those interests can serve as 1031 replacement property. The same ruling is why the trustee can do almost nothing once the property is bought, which makes DSTs passive by design and helpless by design. They are sold as private placements to accredited investors, carry fees that come off the top before any real estate is purchased, cannot be sold freely, and end on the sponsor's timetable. Most hold property outside California, so the state's Form 3840 clawback follows. For a farm family fully leaving operations, with debt to replace and a 45-day clock running, a DST can be a reasonable piece of the plan. It is rarely the whole plan, and we are paid nothing by anyone who sells them.
Within a week of a Central Valley farmland sale closing, the mail changes. Glossy folders arrive offering institutional-grade apartment complexes, Amazon-leased warehouses, and medical office buildings, each available in slices sized exactly to the proceeds that just landed. The folders are from DST sponsors and the broker-dealers who sell for them, and the pitch is honest as far as it goes: here is passive income, diversification, and a 1031-qualified property you can close on before your identification deadline runs out. What the folders do not do is explain the one IRS document that makes all of it work, and what that document costs the investor in control. This guide does.
We wrote it because the question keeps arriving in our search traffic and in our first meetings, and because the reinvestment paths page covers DSTs only as one option among seven. Everything below is educational. Whether a specific offering fits a specific family is a decision made with the family's CPA, with the offering documents open, and we have no stake in the answer.
What a DST is, in the IRS's own words
The authority is Revenue Ruling 2004-86. The IRS considered a Delaware statutory trust that bought a single rental property with a bank loan, leased it to one tenant on a net lease, and sold beneficial interests to investors. It reached two holdings.
Holding 1. The trust described in the ruling "is an investment trust, under § 301.7701-4(c), that will be classified as a trust for federal tax purposes."
Holding 2. "A taxpayer may exchange real property for an interest in the Delaware statutory trust described above without recognition of gain or loss under § 1031, if the other requirements of § 1031 are satisfied."
Rev. Rul. 2004-86, 2004-33 I.R.B., irs.gov.
Two phrases carry the weight. "Described above" means the holdings apply to a trust that looks like the one in the ruling, with the trustee restrictions set out below; sponsors draft their trust agreements to track that description closely. "If the other requirements of § 1031 are satisfied" means the DST solves only the question of what you are buying. The 45-day identification and 180-day closing deadlines, the qualified intermediary, the debt replacement math, and California's own rules all still apply, and they are covered in our farmland 1031 guide.
What the trustee may not do, and why that is the point
The ruling's facts describe a trustee whose "activities are limited to the collection and distribution of income." In the trust the IRS blessed, the trustee may not accept additional contributions of assets or money, may not reinvest the proceeds of a sale, may not renegotiate the terms of the debt used to buy the property, may not renegotiate the lease or enter leases with new tenants except in the existing tenant's bankruptcy or insolvency, and may make only minor non-structural modifications to the property unless the law requires more. Cash between distribution dates sits in short-term obligations and is paid out. Practitioners call these limits the seven deadly sins, and every DST offering document repeats them.
The restrictions exist because they are what makes the trust a passive investment trust rather than a business, which is the line between an interest that qualifies for 1031 treatment and one that does not. They also define the investment. A landlord facing a vacancy can cut the rent, re-tenant, borrow against the building, or put money in to reposition it. A DST trustee can do none of those things. If a property runs into trouble, the usual remedies are to wait, to sell, or to convert the trust into a limited liability company that has those powers but no longer qualifies as replacement property. A family used to deciding when to replant a block, drill a well, or renegotiate with a packer should understand that they are buying the opposite of that.
Who may invest, and why the interests cannot be sold
DST interests are securities, and they are sold as private placements rather than registered offerings, most often under Rule 506(b) of SEC Regulation D. The SEC's own summary of the rule: an issuer "can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors," subject to "no general solicitation or advertising to market the securities," and purchasers receive "restricted securities" that cannot be freely resold (sec.gov). The glossy folders arrive after the sale closes rather than before because the sponsor's broker needs an existing relationship, not an advertisement, to offer you the deal.
Accredited investor is defined in 17 CFR 230.501(a). For an individual, it means net worth, alone or with a spouse, above $1,000,000 excluding the primary residence, or income above $200,000 in each of the two most recent years, $300,000 jointly, with a reasonable expectation of the same this year (Cornell LII). A family that has just sold a quarter section of almonds qualifies on net worth without trying. The test is not the barrier. The restricted-securities status is: there is no exchange, no daily price, and no obligation on anyone to buy your interest back. Plan as though the money is unavailable until the sponsor sells the property.
The fees, and where to find them
Every DST offering comes with a private placement memorandum, and every memorandum has a table, usually titled Estimated Use of Proceeds, that shows what happens to each dollar an investor puts in. Read that table before anything else. The categories vary by sponsor, but they generally include:
| Charge | Who receives it | When |
|---|---|---|
| Selling commissions and dealer-manager fee | The broker-dealer and the representative who sold you the interest | At purchase, from your equity |
| Offering and organization costs | The sponsor, for legal, marketing and formation expense | At purchase, from your equity |
| Acquisition fee | The sponsor, for finding and buying the property | At purchase, from your equity |
| Asset management fee | The sponsor, ongoing | Annually, from property cash flow |
| Disposition fee | The sponsor, on sale of the property | At exit, from sale proceeds |
The up-front items together are what the industry calls the load: money that leaves your investment before a single dollar of real estate is owned. The size varies by offering and is disclosed in the memorandum, which is where you should get the number rather than from a page like this one. The relevant comparison is to buying a property directly, where a seller pays a brokerage commission once and owns the building outright, and to the other reinvestment paths, several of which carry no load at all. In our experience the sales conversation rarely frames it that way, because the person leading the conversation is paid from the load.
Avidity Capital is not. Our Form ADV reports that the firm is compensated solely by advisory fees paid by clients, with no commissions, no broker-dealer activity, and no revenue sharing from sponsors or product providers (CRD 312745). When we sit with a family and an offering memorandum, nobody at the table is paid more if they buy.
The California clawback follows the money
Most DST portfolios hold property in other states: Texas, Arizona, the Carolinas, wherever the sponsor found the building. When California farmland is exchanged for out-of-state replacement property, California does not forgive the deferred tax; it tracks it. The seller files FTB Form 3840 every year until the deferred gain is recognized or the obligation otherwise ends, and the Franchise Tax Board can assess the deferred California tax if the filing stops. A DST changes nothing about that obligation, and the sponsor does not file the form for you. Families who choose a DST for its simplicity should budget for one more annual filing, for as long as the deferral lasts, and should tell their CPA about it before the first return after the exchange.
California's 3 1/3 percent withholding at the close of the farmland sale is a separate matter and is addressed, or not, at escrow, before any replacement property is chosen.
Where a DST fits for a farm family, and where it does not
The honest case for a DST
To defer all the gain, a seller generally has to acquire replacement property of equal or greater value and replace the debt paid off at closing, or add cash. Farmland sales often retire an operating line or a land loan, which leaves the seller needing to take on debt they may not qualify for or want. DST interests come with the property's non-recourse loan already in place, in a fixed ratio, so a family can pick a slice that matches the debt they need to replace. This is the most legitimate technical reason DSTs exist.
A DST can be identified and closed in days, which makes it a credible backup identification when a direct purchase might fall through. Many families use the three-property or 200 percent identification rules to name a DST as insurance against losing the deferral entirely.
For a family whose last operator is retiring and whose children live elsewhere, a passive interest with professional management and a diversified set of tenants can be exactly what they mean when they say they are done.
Where it does not fit
The trustee restrictions are absolute. A family that wants to decide anything about the property should buy a property.
A buyout of a sibling, a child's land purchase, a parent's care. If the money has a known use inside the next several years, restricted securities on a sponsor's timetable are the wrong place for it.
Farmland that passes at death takes a stepped-up basis, which can eliminate the deferred gain the exchange was built to postpone. For some families the right answer to the DST question is that the farm should not have been sold, and our keeping the farm guide sets out when that is so.
The investment ends when the sponsor sells, which may be sooner or later than the family planned. Some sponsors offer a conversion into REIT operating partnership units under section 721, which brings liquidity but generally ends the ability to do another 1031 with that interest, so the deferred gain is recognized when the units are sold. Highly leveraged variants, sometimes marketed as zero-coupon DSTs because all cash flow services the debt, exist mainly to absorb large debt-replacement needs; they pay no current income and magnify the consequences of a property that underperforms. Any family considering one should model the downside with their CPA, not the brochure's base case.
How we handle the DST question
When a DST is on a family's list, we do four things. We read the offering memorandum with the family, starting with the use-of-proceeds table and the trustee powers. We compare more than one sponsor, because the folders that arrive uninvited are the ones with the largest sales budgets, not necessarily the properties a family would choose on the merits. We model the exchange math, the debt replacement, the fees, and the Form 3840 obligation against the alternatives, with the family's CPA. And we coordinate the qualified intermediary so the identification and closing deadlines are met. We take no position on whether the family should buy, we are paid the same if they do not, and the decision is theirs. The fee for that work is the flat fee published on our services and fees page.
Legacy Land Advisory
A folder of DST offerings on the kitchen table?
Bring them to a confidential, no-cost first conversation. We will tell you plainly what the use-of-proceeds tables say, what the alternatives are, and whether our engagement is a fit.
Working with a family as their attorney or CPA? Start here.
Common Questions
DSTs and Farmland:
What Families Ask
What is a DST in a 1031 exchange?
A Delaware statutory trust is a trust that holds one or more income properties, with investors owning undivided beneficial interests in it. In Revenue Ruling 2004-86 the IRS held that a DST structured as described in the ruling is classified as a trust for federal tax purposes and that a taxpayer may exchange real property for an interest in it without recognizing gain under section 1031, if the other requirements of section 1031 are met. In practice a DST is a sponsor-assembled, professionally managed, passive fractional interest in real estate that a seller can name as replacement property and close on quickly, usually with the property's non-recourse debt already in place.
Why can't the DST trustee fix a problem with the property?
Because the IRS ruling that makes DST interests qualify depends on the trustee having almost no power. In the ruling's facts, the trustee may not accept additional contributions, reinvest sale proceeds, renegotiate the debt, renegotiate the lease or take on new tenants except in the tenant's bankruptcy or insolvency, or make more than minor non-structural changes to the property, and it must hold cash only in short-term obligations and distribute income. Practitioners call these limits the seven deadly sins. They are what keep the trust from being treated as a business, and they are also why a DST cannot respond to a vacancy, a market shift, or a capital need the way a landlord can.
Do I have to be an accredited investor to buy a DST interest?
In practice, yes. DST interests are securities sold in private placements, most often under SEC Rule 506(b) of Regulation D, which permits sales to an unlimited number of accredited investors with no general solicitation and delivers restricted securities that cannot be freely resold. Under 17 CFR 230.501(a) a natural person is accredited with individual or joint net worth above $1,000,000 excluding the primary residence, or income above $200,000 in each of the two most recent years ($300,000 jointly) with a reasonable expectation of the same this year. A family that has just sold farmland usually qualifies on the net worth test.
Can I sell my DST interest if I need the money?
Not easily, and you should plan as if you cannot. The interests are restricted securities with no public market; a sale, if one can be arranged at all, is typically at a discount to a thin secondary market. The investment ends when the sponsor sells the property, on the sponsor's timetable, commonly several years to a decade after purchase. Some sponsors offer an exit into a REIT operating partnership under section 721, which provides liquidity in REIT units but generally ends the ability to do a further 1031 exchange with that interest, so the deferred gain is recognized when the units are sold. Money a family may need within the hold period should not be in a DST.
Does a DST trigger California's Form 3840 clawback?
If the DST's property is outside California, yes. California does not forgive the tax deferred on California land; it tracks it. When California property is exchanged for out-of-state replacement property, which most DST portfolios are, the seller files FTB Form 3840 every year until the deferred gain is recognized or the obligation otherwise ends, and California can assess the deferred tax if the filing stops. A DST does not change that, and the sponsor will not file it for you.
Does Avidity Capital sell DSTs?
No. Avidity Capital Inc. is compensated solely by advisory fees paid by clients. It accepts no commissions, referral fees, or revenue sharing from DST sponsors, broker-dealers, qualified intermediaries, or replacement-property providers, and its Form ADV reports no broker-dealer or insurance activity. When a DST is on a family's list, we read the offering documents with them, compare sponsors, model the fees and the debt against the exchange math, and coordinate the qualified intermediary and CPA. Whether to buy one is the family's decision, and we are paid the same either way.
Sources, verified October 2026
Internal Revenue Service, Revenue Ruling 2004-86 (holdings and the trustee restrictions in the ruling's facts). 17 CFR 230.501(a) (accredited investor). U.S. Securities and Exchange Commission, Private Placements, Rule 506(b). Avidity Capital Inc. Form ADV, CRD 312745. Fee categories are described generically; the figures for any offering are in its private placement memorandum. Laws and offerings change; confirm with your CPA and counsel before acting.
Important Disclosures
This guide is educational and expresses the firm's opinions; it does not constitute legal, tax, or investment advice, and it is not an offer or recommendation of any security or any Delaware statutory trust. DST interests are illiquid, restricted securities that involve risk of loss, including loss of principal, and are suitable only for investors who meet the offering's eligibility requirements and can bear those risks. Tax treatment depends on each taxpayer's facts and on compliance with all requirements of section 1031; a past ruling does not determine the result in any particular case. Avidity Capital Inc. does not sell securities, does not practice law, and does not prepare tax returns.
Regulatory Disclosure: Avidity Capital Inc. is a California state-registered investment adviser (CRD# 312745). Registration does not imply a certain level of skill or training. For firm background information, visit adviserinfo.sec.gov/firm/summary/312745.
No Commission Disclosure: Avidity Capital Inc. is compensated solely by advisory fees paid directly by clients. The firm does not receive commissions, referral fees, or revenue-sharing payments from DST sponsors, broker-dealers, qualified intermediaries, replacement-property providers, or any other third party.