A Delaware Statutory Trust is a legal entity constructed under Delaware law. Despite the name, neither its investors nor its underlying investments need to be located in Delaware. The DST is a product of the Delaware Statutory Trust Act (Del. Code Ann. Title 12, §§ 3801 - 3824) which provides DSTs a great deal of structural and organizational flexibility, while offering similar liability protection to that of an LLC or partnership.
In the context of a 1031 exchange investment, multiple investors pool their equity in a DST. Each investor owns their proportionate share of the DST, which in turn owns the underlying property. Investors are known as “beneficiaries” of the Trust and the IRS treats DST interests as direct property ownership, thus qualifying for a 1031 exchange.
DSTs are typically “packaged” by a sponsor who acquires a property, secures financing and retains property management prior to interests being offered to individual 1031 investors. Each investor owns their proportionate share of equity in the DST and is entitled to their proportionate share of income produced by the DST.
Much like an LLC or limited partnership, the DST structure shields investors from property-related liabilities. A DST is a “bankruptcy remote” entity providing protections from creditors of individual beneficiaries from placing liens against the property, giving greater security to lenders and other beneficiaries. DSTs are typically financed with non-recourse debt which limits a lender’s remedies to the DST’s underlying property and beneficiaries of a DST do not carry any personal liabilities under the loan.