By the Numbers
Plenty of East Bay industrial owners are in the same spot: the building has appreciated for decades, the depreciation is used up, and the owner is done — done with roofs, done with tenant calls, done with 2 a.m. alarm company voicemails. But an outright sale means capital gains tax plus depreciation recapture at up to 25%, often a seven-figure check to the IRS after a long hold. A Delaware Statutory Trust — a DST — is the structure built for exactly this fork: it lets you 1031 out of the building, defer the full tax bill, and never manage anything again.
What a DST actually is
A DST is a trust that owns institutional-grade real estate — distribution centers, medical buildings, apartments, net-leased retail — assembled by a professional sponsor. You buy a fractional interest in the trust, and the IRS treats that interest as direct ownership of real estate. That's the key: under IRS Revenue Ruling 2004-86, a DST interest qualifies as like-kind replacement property in a 1031 exchange. You sell your industrial building, your exchange proceeds go into one or more DSTs, and your capital gain and recapture are deferred exactly as if you'd bought another building.
The difference is what happens after closing. Nothing. The sponsor manages the property, the trustee signs everything, and you receive monthly distributions of your share of the net income. No lender ever asks for your personal guarantee, and no tenant ever calls you.
Why it fits owners who are done managing
Three reasons DSTs keep coming up in exit conversations with retiring owners:
- The management burden actually ends. A NNN building is less work than multi-tenant, but it's not zero — there's still a roof, a renewal, a property tax appeal. A DST is truly passive. For owners moving out of state or simplifying an estate, that's the point.
- It solves the 45-day problem. A conventional exchange lives or dies on finding a replacement building inside the 45-day identification window. DST interests are on the shelf and can typically close in days. There's no bidding war, no escrow that can crater your exchange at day 160.
- The estate math is clean. Deferral isn't forgiveness — but held until death, the interest passes to heirs at a stepped-up basis under current law, and the deferred gain is never recognized. Fractional interests also divide neatly among children in a way one building never does.
The trade-offs — read this part twice
DSTs are a legitimate tool, not a free lunch. Go in with clear eyes:
- Fees are real. Upfront loads (sponsor fees, commissions, offering costs) commonly run around 10–15% of invested capital, with ongoing management fees on top. That drag comes out of your return, and it's the main reason to compare offerings carefully.
- You give up control and liquidity. Typical holds run five to ten years, there's no meaningful resale market, and you can't refinance, renegotiate, or force a sale. The trust's restrictions are rigid by design — that rigidity is what preserves the tax treatment.
- Returns are income-oriented, not value-add. You're trading the upside you could create with your own hands for stability. Most offerings target steady cash flow, not a double.
- Accredited investors only. DSTs are securities offerings, sold through advisors and broker-dealers to accredited investors.
What happens at the end of the hold
When the sponsor sells the property, you can 1031 again — into another DST or back into direct ownership — and keep deferring. Many sponsors also offer a 721 exchange (an "UPREIT"), converting your DST interest into operating partnership units of a REIT. That adds diversification and some liquidity, but it's a one-way door: once in REIT units, you can't 1031 back into real estate. For most retiring owners, the practical plan is simpler — keep exchanging, collect the income, and let the step-up resolve the tax bill.
Pro Tip: Use a DST as your exchange safety net
Even if you'd rather buy another building, name a DST as one of your three properties on the 45-day identification list. If your target building falls through at day 140, the DST closes in days and rescues the entire exchange. It costs nothing to identify it — and it turns your exchange's biggest risk into a footnote.
Who it fits — and who it doesn't
The DST route fits owners exiting management for good: retiring, relocating, or planning an estate, where income and simplicity beat upside. It's a poor fit for owners who still want to drive value — if you'd rather reposition, re-tenant, and sell again, direct ownership through a conventional exchange keeps that control in your hands. Many owners land in between and split proceeds: part into a replacement building, part into DSTs.
The right starting point is knowing what your building would net today — the sale price, the loan payoff, and the tax bill a 1031 would defer. From there, the DST conversation is a math problem instead of a leap.
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Start the ConversationThis article is general information, not tax, legal, or investment advice. DSTs are securities offered to accredited investors through licensed professionals. Consult your CPA, attorney, and financial advisor before acting.