Glossary of 1031 DST Terms
Fifty terms that come up regularly in 1031 exchanges and Delaware statutory trust investments, defined without jargon. Terms that have a dedicated page on this site include a 'More on this' link if you want to go deeper. If you don't see a term you need, our advisors can answer it on a consultation call.
A
Accredited Investor
An individual who meets specific income or net worth thresholds set by the SEC. The most common qualifying paths are a net worth over $1 million excluding primary residence, or annual income over $200,000 ($300,000 with a spouse) for the last two years. DST 1031 offerings are private placement securities, which means they’re only available to accredited investors.
Asset Class
A category of real estate defined by what the property is used for. Common DST 1031 asset classes include multifamily (apartments), net-lease (single-tenant commercial), industrial and logistics (warehouses), medical office, self-storage, and student housing. Each asset class has different demand drivers and risk profiles.
Asset Management Fee
An ongoing fee paid to the DST sponsor for managing the trust and the underlying property during the hold period. Asset management fees are typically calculated as a percentage of gross revenue or property value and are disclosed in the offering documents.
B
Beneficial Interest
Your ownership stake in a Delaware statutory trust. A beneficial interest entitles the holder to a proportional share of the trust’s income and any net sale proceeds. For tax purposes, the IRS treats a DST beneficial interest as a direct interest in real estate, which is what allows it to qualify in a 1031 exchange.
Boot
Any non-like-kind value received in a 1031 exchange. Common examples are cash left over after the replacement property is acquired, or a reduction in debt that isn’t replaced. Boot is taxable in the year of the exchange. Avoiding boot is one of the reasons DST 1031 exchanges are popular: investors can size their investment precisely to match the relinquished property’s value and debt.
Build-to-Rent
A category of multifamily real estate where single-family homes or townhomes are built specifically to be rented rather than sold. Build-to-rent communities appear in some multifamily DST 1031 offerings, particularly in Sun Belt growth markets.
C
Capital Gains Tax
Federal and state tax owed on the appreciation of an investment when it’s sold. For real estate, capital gains tax can be 15% or 20% federal depending on income bracket, plus state tax that varies by state. A qualifying 1031 exchange defers capital gains tax indefinitely as long as the proceeds stay invested in like-kind real estate.
Cap Rate
Short for capitalization rate. The property’s net operating income divided by its market value, expressed as a percentage. Cap rates are widely used to compare real estate investments. Lower cap rates generally signal higher-quality or lower-risk properties; higher cap rates signal more risk or weaker location.
Cash-on-Cash Return
Annual cash distributions divided by the amount of cash an investor put in, expressed as a percentage. A 5% cash-on-cash return means $5,000 in annual distributions on a $100,000 investment. This is the metric most DST 1031 offerings quote for projected annual yield.
Class A Property
Newer, higher-quality real estate in prime locations, typically with strong tenant credit and modern building systems. Class A is the highest tier in the standard A/B/C real estate quality classification. Most institutional DST 1031 offerings focus on Class A and high-end Class B properties.
Closing Date
The day a real estate transaction legally completes and ownership transfers. In a 1031 exchange, the closing date of the relinquished property sale starts both the 45-day identification clock and the 180-day completion clock.
Constructive Receipt
A tax law concept that says you’ve effectively received funds whenever you have control over them, even if you haven’t physically taken them. In a 1031 exchange, the seller must avoid constructive receipt of the sale proceeds. This is why a qualified intermediary holds the funds during the exchange period.
D
Delaware Statutory Trust (DST)
A legal entity formed under Delaware state law that holds investment property on behalf of multiple investors. Investors own beneficial interests in the trust. The IRS treats those interests as direct interests in real estate, which is what allows a DST to qualify as 1031 replacement property under Revenue Ruling 2004-86. A DST is one of the only fractional real estate structures the IRS accepts for 1031 exchanges.
Depreciation
A tax deduction that allows real estate owners to recover the cost of the property over time. The IRS lets investment property owners deduct a portion of the building’s value each year as depreciation. In a DST, the trust passes depreciation through to investors proportionally, which can shelter a meaningful portion of distributions from current income tax.
Depreciation Recapture
When investment real estate is sold, the IRS recaptures the depreciation taken over the holding period and taxes it at a higher rate than long-term capital gains (currently up to 25% federal). A qualifying 1031 exchange defers depreciation recapture along with capital gains tax.
Disposition
The sale or other disposal of a real estate asset. In a DST context, the disposition is when the sponsor sells the property held by the trust. After disposition, investors receive their share of the net proceeds and can either 1031 exchange again into new replacement property or take the cash and pay the deferred tax.
Distribution
A cash payment from the DST to its investors, paid from the net operating income of the underlying property. Most DST 1031 offerings pay monthly distributions. Distributions are projected, not guaranteed, and can be reduced or suspended if property performance falls short.
E
Equity
The portion of a property’s value that isn’t financed with debt. In a 1031 exchange, your equity is the cash proceeds from the relinquished property after paying off any existing mortgage and transaction costs. The replacement property must use all of your equity (or you create taxable boot).
Exchange Period
The 180-day window starting from the closing of the relinquished property sale, during which the replacement property must close. The exchange period runs concurrently with the 45-day identification period: at day 45, identification must be complete, and at day 180, closing must be complete.
F
Fractional Ownership
Owning a defined share of an asset rather than the whole asset. In a DST, multiple investors hold fractional beneficial interests in the trust that owns the underlying property. Fractional ownership is what allows individual investors to participate in institutional-quality real estate they couldn’t afford to buy directly.
I
Identification Period
The 45-day window starting from the closing of the relinquished property sale, during which the replacement property (or properties) must be formally identified in writing to the qualified intermediary. The identification rules include the three-property rule, the 200% rule, and the 95% rule.
Illiquidity
The inability to sell an investment quickly without taking a significant price discount. DST 1031 interests are illiquid by design. There is no public secondary market, and the seven DST prohibitions prevent the trust from redeeming investor interests. Investors should plan to hold for the sponsor-targeted hold period of 5 to 10 years.
L
Like-Kind Exchange
The technical term for a 1031 exchange. Under Section 1031 of the Internal Revenue Code, gain on the sale of investment or business-use real estate can be deferred if the proceeds are reinvested in like-kind property of equal or greater value, subject to specific rules and deadlines. For real estate, like-kind is interpreted broadly: an apartment building can be exchanged for a warehouse, for example.
Loan-to-Value (LTV)
The ratio of mortgage debt to property value, expressed as a percentage. A property worth $10 million with $6 million in debt has an LTV of 60%. Most DST 1031 offerings carry LTVs in the 40 to 65% range, depending on asset class and sponsor strategy.
M
Master Lease
A long-term lease arrangement that lets a DST hold a property while delegating operational decisions to a master tenant. Master leases are sometimes used by sponsors to work around the seven DST prohibitions, particularly for operationally intensive properties. The structure is more complex than a standard DST and adds an additional layer of fees.
N
Net Lease
A lease structure where the tenant pays some or all of the property operating expenses (property taxes, insurance, maintenance) in addition to rent. A triple-net lease (NNN) means the tenant pays all three. Net-lease properties are common in DST 1031 offerings because the tenant’s operating obligations reduce the landlord’s workload, which fits the passive DST structure.
Net Operating Income (NOI)
A property’s gross income minus operating expenses, before mortgage payments and income tax. NOI is the headline number used to value commercial real estate. A property with a $1 million NOI valued at a 5% cap rate is worth $20 million.
Non-Recourse Debt
Loans that are secured only by the property itself, with no personal guarantee from the investors. If the property defaults, the lender can foreclose on the property but cannot pursue the investors personally for any shortfall. Almost all DST 1031 offerings use non-recourse debt at the trust level.
O
Offering Documents
The package of legal documents that describes a specific DST 1031 investment. The most important document is the Private Placement Memorandum (PPM). Other documents typically include the trust agreement, the subscription agreement, the loan documents, and a property condition report. Investors should review the full package before subscribing.
On-Campus / Off-Campus (Medical Office)
A common distinction in medical office real estate. On-campus medical office buildings sit on or adjacent to a hospital and are typically leased to physician groups affiliated with the hospital. Off-campus buildings are freestanding outpatient facilities, often anchored by a major health system. Both qualify for DST 1031 treatment but have different demand drivers.
P
Passive Investment
An investment that requires no day-to-day decision-making from the investor. DST 1031 interests are passive investments: the sponsor handles property management, leasing, financing, and the eventual sale. The IRS requires DST investors to be passive (one of the seven DST prohibitions bars investors from any management authority over the property).
Private Placement Memorandum (PPM)
The primary legal disclosure document for a private placement security like a DST 1031 offering. The PPM describes the property, the sponsor, the financial projections, the fee structure, the debt terms, and all material risks. Reviewing the PPM is essential before any subscription.
Property Manager
The third party that handles day-to-day operations at a DST-owned property: leasing, maintenance, tenant relations, vendor management, and rent collection. Property managers are typically experienced firms with track records in the specific asset class. They are paid out of property income and disclosed in the offering documents.
Purpose-Built Student Housing
Apartment communities designed specifically for college students rather than conventional renters. Purpose-built student housing typically includes shared common areas, study lounges, by-the-bed leasing, and amenities calibrated to college schedules. Distinct from conventional apartments near a university that happen to rent to students.
Q
Qualified Intermediary (QI)
A third-party firm that holds the sale proceeds from a 1031 exchange so the investor never has constructive receipt of the funds. Engaging a qualified intermediary before the relinquished property sale closes is mandatory for the exchange to qualify under IRS rules. The QI also handles documentation and coordinates with the closing parties.
R
Real Estate Investment Trust (REIT)
A publicly or privately traded company that owns or finances income-producing real estate. REIT investors buy shares of the company. REITs and DSTs are sometimes confused, but they are different structures with different tax treatment. REIT shares do not qualify as like-kind replacement property in a 1031 exchange. DST interests do.
Relinquished Property
The property being sold in a 1031 exchange. The relinquished property generates the sale proceeds that will be exchanged into the replacement property. Tax deferral depends on identifying and closing on a replacement property within the IRS deadlines after the relinquished property sale.
Replacement Property
The property being acquired in a 1031 exchange to replace the sold property. For tax deferral, the replacement property must be like-kind, of equal or greater value, with debt at least equal to what was paid off on the relinquished property. A DST 1031 interest can serve as replacement property.
Revenue Ruling 2004-86
The 2004 IRS ruling that established Delaware statutory trusts as a qualifying form of replacement property for 1031 exchanges. The ruling also created the seven DST prohibitions, which restrict what the trust can do during the hold period. Almost everything specific to DST 1031 structure traces back to this ruling.
S
Seven DST Prohibitions
A set of IRS restrictions from Revenue Ruling 2004-86 that the trust must follow to qualify as 1031 replacement property. The prohibitions prevent the trust from raising new capital after closing, renegotiating debt, reinvesting sale proceeds, making non-routine capital improvements, accepting non-pro-rata distributions, modifying leases, or letting investors have management authority. The sponsor handles compliance at the trust level.
Sponsor
The firm that acquires a property, creates the Delaware statutory trust, and offers beneficial interests to investors. The sponsor sets the business plan, arranges the debt, manages compliance with the seven DST prohibitions, and oversees the eventual sale. Sponsor track record and financial strength are essential diligence items on any DST 1031 offering.
Stepped-Up Basis
A tax treatment that resets the cost basis of inherited property to its fair market value at the date of the original owner’s death. For real estate, stepped-up basis can eliminate accumulated capital gains and depreciation recapture for the heirs. This is why 1031 exchanges (which defer rather than eliminate tax) are common in estate planning.
Subscription Agreement
The legal document an investor signs to subscribe to a DST 1031 offering. The subscription agreement records the investor’s accredited status, the dollar amount being invested, and the investor’s acknowledgment of the material risks disclosed in the Private Placement Memorandum.
T
Tenant in Common (TIC)
An older fractional ownership structure that pre-dated DSTs as a 1031 replacement option. TIC investors held direct fractional title to the property. The structure required unanimous investor decisions on most major actions, which proved unwieldy. Most fractional 1031 replacement is now done through DSTs, which solved the operational problems of TICs.
Three-Property Rule
One of the IRS identification rules in a 1031 exchange. The three-property rule lets the investor identify up to three replacement properties of any value during the 45-day identification window. Most 1031 exchanges use this rule. The alternative rules (the 200% rule and the 95% rule) apply when more than three properties are identified.
Triple Net Lease (NNN)
A lease structure where the tenant pays property taxes, insurance, and maintenance in addition to rent. The landlord receives net rent with very little operating responsibility. Triple net leases are common in net-lease DST 1031 offerings to creditworthy corporate tenants.
U
Underwriting
The analysis a sponsor performs to evaluate a property before acquiring it. Underwriting covers market fundamentals, tenant credit, debt terms, projected income and expenses, capital needs over the hold period, and the assumed exit price. The underwriting model is summarized in the offering documents and is one of the most important items to review before subscribing.
V
Value-Add
A real estate investment strategy where the sponsor plans to increase property value during the hold period through renovations, repositioning, lease-up, or operational improvements. Value-add DSTs typically project lower current cash flow than stabilized DSTs but higher returns at sale. The seven DST prohibitions restrict the kinds of value-add work that can be done inside a DST structure.