Why DSTs Make Sense for Multifamily Investors—the 1031 Exchange Solution

As someone who has spent years helping investors navigate multifamily real estate, I’ve seen a growing interest in Delaware Statutory Trusts (DSTs)—especially among those looking for tax-efficient, hands-off investment opportunities. DSTs offer a unique way to own institutional-quality real estate while benefiting from the power of a 1031 exchange.

Whether you’re a seasoned real estate investor or just starting to explore tax-advantaged structures, understanding DSTs can open up new possibilities. Let’s break it down.

What is a DST, and Why Should Investors Care?

A Delaware Statutory Trust (DST) is a legal entity that allows multiple investors to co-own a piece of real estate—such as a stabilized multifamily community—without the responsibilities of direct property management. A professional sponsor (like us at Hamilton Zanze) manages the asset, while investors receive passive income and potential appreciation.

One of the biggest advantages? DSTs are 1031 exchange eligible, which means if you’re selling a property and want to defer capital gains taxes, you can exchange in and out of a DST.

How a DST Works in Practice

Let’s say you’re an investor who owns a small apartment building you bought years ago. It’s been a great investment, but managing tenants, repairs, and lease negotiations has become a headache. You’re ready to sell—but you don’t want to take a tax hit on the capital gains.

Here’s where a DST could be a great fit:

• Instead of paying a hefty capital gains tax, you 1031 exchange your sale proceeds into a DST that owns a professionally managed multifamily property.
• You retain real estate exposure and continue earning passive income—without the operational burden.
• The DST structure allows you to co-invest alongside other high-net-worth individuals in a premium, institutional-grade property that you likely wouldn’t buy on your own.
• You eliminate the pressure of identifying and managing a replacement property within the strict 1031 exchange timeline.

Now, instead of dealing with leaky faucets and tenant turnover, you’re enjoying cash flow from a professionally managed property. And when the DST eventually sells the asset, you have the flexibility to either cash out or complete another 1031 exchange into your next investment.

Why Are More Investors Choosing DSTs?

DSTs offer a compelling alternative to direct real estate ownership for a few key reasons:

1. Tax Efficiency

DSTs qualify for 1031 exchanges, the same as direct ownership, allowing investors to defer capital gains taxes and keep more of their wealth invested.

2. Passive Income, No Management Responsibilities

Investors receive distributions from rental income without the daily demands of property management.

3. Access to Institutional-Quality Properties

DSTs provide entry into premium multifamily assets in competitive markets—properties that may be out of reach for an individual investor.

4. Diversification

Investors can spread capital across multiple DSTs, reducing concentration risk and increasing market exposure.

5. Estate Planning Benefits

DST interests can be passed on to heirs, often with a step-up in basis, which can significantly reduce tax liability. Additionally, the transfer of DST beneficial interests is much easier and more streamlined compared to the transfer of direct real estate ownership, making it a more efficient option for estate planning.

Is a DST Right for You?

DSTs aren’t for everyone. They’re best suited for accredited investors with a long-term outlook, as these are illiquid investments. Additionally, the structure means you don’t have direct control over the asset—making them ideal for those who prioritize passive income and tax efficiency over active management.

At Hamilton Zanze, we’ve spent over two decades sponsoring the acquisition and management of multifamily real estate investments. We understand the nuances of 1031 exchanges and DST structures, and we’re always happy to share insights with investors looking to explore their options.

If a DST sounds like it might be a fit for your investment strategy, let’s talk.