Delaware Statutory Trust vs Structured Installment Sale

Hans Goldstein handles structured installment sales for sellers leaving real estate. Email hans@goldsteinco.net or call 213-340-2018.

One distinction first, because the acronym is shared: this page is about the Delaware statutory trust, a 1031 replacement property. A deferred sales trust is a different arrangement, an installment sale to a third-party trust; see deferred sales trust and why a structured sale is not a deferred sales trust.

What is a Delaware statutory trust?

A DST is a trust formed under Delaware law that holds one or more properties, usually a net-leased building, apartment complex or portfolio, bought and managed by a sponsor. Investors buy beneficial interests. Under Rev. Rul. 2004-86, a properly limited DST interest is treated as a direct interest in real estate for §1031, so it can be the replacement property for a relinquished rental or investment property.

The same ruling is why DSTs are so rigid. The trustee may not accept new contributions, may not renegotiate the debt or the leases (except on a tenant's bankruptcy or insolvency), may not buy other assets beyond short-term investments, and may make only minor non-structural changes to the building. Practitioners call these limits the "seven deadly sins." If the property needs new capital or a new strategy, the usual fix is converting the trust into an LLC, which can end the 1031 treatment for later exchanges.

How does a DST 1031 exchange work?

1. You sell the relinquished property through a qualified intermediary; you never touch the cash.
2. You identify replacement property, which can be one or more DSTs, within 45 days, and close within 180 days (§1031(a)(3)).
3. To defer all of the gain, you reinvest all of the net proceeds and replace the debt you paid off; any cash or debt relief you keep is taxable boot.
4. Your basis carries over into the DST interest, so the deferred gain, including prior depreciation, travels with you.
5. When the sponsor sells the property, typically in 5 to 10 years, you owe the tax unless you exchange again.

What does a DST cost, and who can buy one?

• Investors: usually accredited investors only: at least $1 million of net worth not counting your home, or income over $200,000 ($300,000 joint) in each of the last two years (17 C.F.R. §230.501(a)).
• Selling commissions: in 83 SEC Form D filings for DST offerings from 2024 to 2026 that reported them, selling commissions had a median of about 6% of the offering, and 76 of the 83 fell between 5% and 10%. Form D does not show the sponsor's acquisition, financing and management fees, which come on top.
• Liquidity: DST interests are securities with resale limits (17 C.F.R. §230.502(d)); there is usually no market to sell into before the sponsor's exit.
• Sponsor risk: your outcome depends on one sponsor and one or a few properties. In February 2026 a senior-housing sponsor, Inspired Healthcare Capital, filed Chapter 11 with DST affiliates among the debtors (Bankr. N.D. Tex. No. 26-90007).

How does a DST compare with a structured installment sale?

Two points cut against the structured sale and belong up front. A DST can defer 100% of the gain for as long as you keep exchanging, and it can end with a step-up at death; an installment note cannot (see income in respect of a decedent). A structured sale, by contrast, ends your real estate exposure: no tenant, sponsor or cap-rate risk, and cash on a known schedule.

What does the worked example look like?

Illustrative facts: a married couple sells a rental for $3,000,000 with an adjusted basis of $900,000 after $600,000 of depreciation, no debt, and ignores selling costs. Gain: $2,100,000, of which $600,000 is unrecaptured §1250 gain. Other taxable income: $100,000 a year. 2026 federal tables (Rev. Proc. 2025-32), computed under §1(h).

Cash sale. Federal income tax on the gain in one year: $434,149, plus a 3.8% NIIT of about $75,324 (MAGI about $2,232,200, less the $250,000 threshold).

DST. All $3,000,000 goes into DST interests through the exchange. Federal tax now: $0. If the median 6% selling commission applied to a $3,000,000 raise, about $180,000 of the offering's capital would go to commissions before sponsor fees. The $2,100,000 gain is still there, embedded in a carryover basis, and comes due when the DST sells unless you exchange again.

Structured sale. The buyer pays $3,000,000 at closing. The seller takes $300,000 at closing and $270,000 of principal a year for 10 years, plus a fixed rate. Gross profit percentage: $2,100,000 / $3,000,000 = 70%.

That is about $72,000 less federal income tax on the gain than the cash sale, before the tax on the interest (ordinary income each year), and the NIIT falls to the part of each year's MAGI above $250,000, interest included. The 3.8% NIIT is not avoidable at high income; spreading only keeps more years under the threshold. Brackets after 2026 are indexed, so later-year figures are illustrative. Your CPA runs the real numbers.

When does each one fit?

A DST fits a seller who wants to stay in real estate, can live with a sponsor's timeline and fees, meets the accreditation test, and values the step-up at death. A structured installment sale fits a seller who is done with real estate and wants a predictable paycheck with the tax spread across it. A seller can also split the deal: exchange part and structure the rest, or structure the boot in a partial 1031.

The structured sale in one paragraph: the buyer pays in full at closing; before closing, you agree to take the proceeds as scheduled payments from an assignment company that funds them with an annuity from an A-rated insurer. The payments are contractually guaranteed by the insurer's claims-paying ability. The trade-offs: the schedule is locked (no speeding up, borrowing against or cashing out, which is what protects the deferral); payments depend on the assignment company and the insurer behind it; the installment method is settled law (§453, Pub 537, Form 6252), but this specific assignment structure has no published IRS ruling, so your CPA or tax attorney should review the documents; and a commission is built into the pricing.

Frequently asked

Q: Is a Delaware statutory trust the same as a deferred sales trust? A: No. A Delaware statutory trust is real estate you buy as replacement property in a 1031 exchange. A deferred sales trust is an installment sale to a third-party trust that reinvests the proceeds. They share the acronym and nothing else.

Q: Can I do a 1031 exchange into a DST? A: Yes. Rev. Rul. 2004-86 treats an interest in a properly limited DST as a direct interest in real estate, so it can be replacement property. The 45-day and 180-day deadlines still apply.

Q: What are the main risks of a DST? A: Illiquidity, a single sponsor and property, fees that are not fully visible in the offering summary, and rigid trust terms under Rev. Rul. 2004-86. Sponsors can fail; one senior-housing sponsor filed Chapter 11 with DST affiliates in February 2026.

Q: Who can invest in a DST? A: Usually only accredited investors: $1 million of net worth excluding your home, or income over $200,000 ($300,000 joint) in each of the last two years.

Q: Which defers more tax, a DST or a structured installment sale? A: A DST can defer all of it for as long as you keep exchanging. A structured sale defers the gain in the payments you have not received yet, and §1245 recapture is taxed in the year of sale. The structured sale ends your real estate risk; the DST keeps it.

Q: What happens at death? A: DST interests generally get a stepped-up basis. The unpaid gain in an installment note is income in respect of a decedent, taxed to the heirs as the payments arrive.

What should you read or run next?

• SIS vs 1031 exchange
• 1031 exchange alternatives
• Deferral options compared
• Deferred sales trust calculator (a different DST)
• What is a structured installment sale?
• Structured installment sale guide
• IRC Section 453
• Capital gains exit calculator
• All SIS calculators and tools

Who wrote this?