Passive real estate investing has become one of the fastest-growing strategies among investors looking to reduce management responsibilities while continuing to generate income and preserve long-term wealth. In 2026 and beyond, Delaware Statutory Trusts (DSTs) continue to gain traction among investors exiting rental properties, multifamily portfolios and actively managed commercial assets through 1031 exchanges.

A DST allows multiple investors to purchase fractional ownership interests in institutional-quality real estate while remaining fully passive. Investors do not manage tenants, negotiate leases, oversee maintenance or handle financing. Instead, professional sponsors and asset managers operate the property on behalf of beneficial owners.

For many investors, the appeal is straightforward: maintain exposure to real estate, preserve potential tax advantages and eliminate the operational burden that often comes with direct ownership.

DST investments are commonly used within 1031 exchanges, but they are increasingly being explored by investors seeking hands-off real estate investing strategies, retirement income planning and portfolio diversification.

What Is Passive Real Estate Investing?

Passive real estate investing refers to investment structures where the investor owns or participates in real estate assets without actively managing the property.

Traditional real estate ownership is typically active. Landlords handle:

• Tenant issues
• Repairs and maintenance
• Leasing
• Financing
• Insurance coordination
• Property taxes
• Vendor management
• Vacancy risk
• Capital improvements

Passive structures shift those responsibilities to professional operators.

Common forms of passive real estate investing include:

Among these structures, DSTs occupy a unique position because they can qualify as replacement property in a 1031 exchange while still offering fractional ownership and passive management.

What Is a DST Property?

A Delaware Statutory Trust is a legal trust structure that holds title to real estate on behalf of multiple investors. Each investor owns a beneficial interest in the trust rather than direct title to the property itself.

Under IRS Revenue Ruling 2004-86, DST interests may qualify as “like-kind” replacement property for purposes of a 1031 exchange.

This means investors may be able to:

• Sell investment real estate
• Defer capital gains taxes
• Reinvest proceeds into DST interests
• Transition from active ownership into passive ownership

DSTs are commonly used for:

• Multifamily apartment communities
• Medical office buildings
• Industrial facilities
• Distribution centers
• Net lease retail
• Self-storage facilities
• Hospitality assets

Many investors first encounter DSTs after years of active property management. A landlord managing multiple rental homes or a family overseeing a commercial property portfolio may eventually seek a more passive structure without triggering immediate taxation from a sale.

DSTs were largely designed to solve that transition problem.

How Passive DST Investing Works

A DST sponsor acquires or structures a real estate offering. Investors then purchase fractional beneficial interests in the trust.

The sponsor and professional management teams oversee:

• Leasing
• Financing
• Maintenance
• Operations
• Asset management
• Reporting
• Property disposition

Investors receive proportional distributions from property cash flow while remaining passive owners.

The structure is often compared to “owning real estate without being the landlord.”

Example of Passive DST Investing

An investor owns a four-unit rental property purchased years ago for $500,000. The property is now worth $1.4 million.

Selling outright could trigger:

• Federal capital gains tax
• State tax
• Depreciation recapture
• Net investment income tax

Instead, the investor completes a 1031 exchange and reallocates proceeds into:

• A multifamily DST
• An industrial DST
• A medical office DST

Rather than managing tenants and repairs directly, the investor receives passive income distributions while professional sponsors oversee operations.

Why Investors Use DSTs for Passive Income

Elimination of Active Management

One of the primary drivers behind DST growth is the desire to eliminate operational headaches.

Investors transitioning into retirement often no longer want responsibility for:

• Tenant disputes
• Emergency maintenance calls
• Lease negotiations
• Renovation oversight
• Vacancy management

DSTs remove those day-to-day responsibilities.

This transition is particularly common among aging landlords who have accumulated appreciated investment property over decades.

Access to Institutional Real Estate

DSTs can provide access to larger commercial assets that individual investors may not otherwise access directly.

Examples include:

• $50M apartment communities
• National industrial portfolios
• Distribution centers
• Class A medical office assets
• Long-term triple net leased properties

Instead of purchasing an entire asset independently, investors can own fractional interests.

Portfolio Diversification

Many direct real estate investors remain concentrated in:

• One geographic market
• One property type
• One asset

DSTs allow investors to diversify across:

• Asset classes
• Markets
• Tenant profiles
• Lease structures

An investor selling one rental property could spread proceeds across multiple DST offerings.

Potential Tax Deferral Through 1031 Exchanges

DSTs are frequently used as replacement property in a 1031 exchange.

This may allow investors to defer:

• Federal capital gains taxes
• State taxes
• Depreciation recapture
• Net investment income taxes

The tax deferral component remains one of the strongest drivers behind DST adoption.

Why Some Investors Move From Rentals Into DSTs

Many investors eventually reach a point where active ownership becomes inefficient.

Common triggers include:

• Burnout from property management
• Retirement planning
• Inheritance situations
• Tenant fatigue
• Geographic relocation
• Consolidation strategies
• Estate planning considerations

DSTs are often viewed as a “bridge” between active ownership and fully passive investing.

Instead of liquidating real estate entirely, investors maintain exposure to income-producing real estate while simplifying operations dramatically.

DSTs vs Direct Ownership

The tradeoff is clear. DSTs offer simplicity and passivity, but investors sacrifice operational control and liquidity.

Risks of Passive DST Investing

Passive does not mean risk-free. DST investments carry material risks that investors should understand before investing.

Limited Liquidity

DSTs are generally illiquid investments. There is no active public marketplace for DST interests, and holding periods often range from 5 to 10 years or longer. Investors should be prepared to hold the investment through the intended lifecycle.

Lack of Investor Control

Investors do not control:

• Leasing decisions
• Financing
• Asset disposition timing
• Property operations
• Capital improvements

The sponsor controls operational decisions.

Real Estate Market Risk

DSTs remain real estate investments.

Performance can be impacted by:

• Vacancy
• Tenant defaults
• Economic downturns
• Interest rate changes
• Market shifts
• Property-specific issues

Distribution Risk

Projected cash flow is not guaranteed.

Economic conditions or operational issues may reduce investor distributions.

Sponsor Risk

The quality and experience of the sponsor matters significantly.

Poor underwriting, operational mistakes or weak asset management can negatively impact performance.

Understanding the “Seven Deadly Sins” of DSTs

IRS Revenue Ruling 2004-86 established operational restrictions that help preserve DST status for 1031 exchange purposes.

These restrictions are commonly called the “Seven Deadly Sins.”

1. No Future Capital Contributions

Once the offering closes, new capital generally cannot be added by investors.

2. Debt Restrictions

The trustee cannot renegotiate existing financing or obtain new loans except in narrow circumstances.

3. No Reinvestment of Sale Proceeds

When property is sold, proceeds must generally be distributed rather than reinvested automatically.

4. Required Cash Distributions

Cash flow must generally be distributed to investors aside from necessary reserves.

5. Limited Capital Improvements

Only minor repairs, maintenance or legally required improvements are permitted.

6. Reserve Restrictions

Cash reserves must remain invested in short-term debt obligations.

7. Lease Restrictions

The trustee has limited ability to renegotiate or create new leases.

These restrictions are important because they preserve the passive nature of the investment. They also limit flexibility when market conditions change.

Can DSTs Generate Passive Retirement Income?

Many investors use DSTs as part of retirement planning strategies.

Potential benefits may include:

• Monthly or quarterly distributions
• Elimination of landlord responsibilities
• Estate planning advantages
• Access to professionally managed real estate
• Continued real estate exposure

DSTs are commonly discussed among:

• Retiring landlords
• High-net-worth investors
• Estate planning professionals
• 1031 exchange investors

Some investors also view DSTs as transitional vehicles before moving into broader passive investment structures later in retirement.

Estate Planning Considerations

DSTs are frequently discussed within multigenerational wealth planning strategies.

Potential considerations may include:

• Fractional inheritance structures
• Simplified asset division among heirs
• Potential step-up in basis at death
• Elimination of active management responsibilities for beneficiaries

Because DST interests are fractional ownership interests, they may be easier to divide among multiple heirs compared to directly owned real estate.

Investors should consult estate planning and tax professionals regarding their specific situation.

Are DSTs Better Than REITs?

DSTs and REITs are often compared, but they serve different purposes.

DSTs are generally favored by investors seeking:

• 1031 exchange eligibility
• Direct real estate exposure
• Passive ownership transition strategies

REITs may appeal more to investors prioritizing liquidity.

Who Typically Invests in DSTs?

DST investors often include:

• Retiring landlords
• Multifamily investors
• Commercial property owners
• Family offices
• Accredited investors
• Estate planning-focused investors
• Investors exiting active management

Many investors arrive at DSTs after decades of direct ownership.

The transition from active to passive ownership is often the primary motivation.

Is Passive Real Estate Investing With DSTs Right for You?

DSTs are not ideal for every investor.

Some investors prefer:

• Operational control
• Direct ownership
• Flexible exit timing
• Active value-add strategies

Others prioritize:

• Simplicity
• Income
• Tax deferral
• Reduced management burden
• Diversification

The appropriate structure depends heavily on:

• Investment goals
• Liquidity needs
• Risk tolerance
• Tax considerations
• Estate planning objectives

Because DSTs involve securities and complex tax considerations, investors should review all offering documents carefully and consult qualified financial, tax and legal professionals before investing.

Frequently Asked Questions

What is passive real estate investing?

Passive real estate investing involves owning or participating in real estate assets without actively managing the property. Professional operators or sponsors handle operations, leasing and management responsibilities.

Are DSTs considered passive investments?

Yes. DSTs are structured as passive real estate investments where investors own beneficial interests while sponsors manage the property.

Can DSTs be used in a 1031 exchange?

Yes. Under IRS Revenue Ruling 2004-86, qualifying DST interests may serve as replacement property in a 1031 exchange.

Do DST investors manage tenants?

No. Investors do not manage tenants, maintenance or property operations directly.

Are DST investments liquid?

Generally no. DSTs are considered illiquid investments with holding periods often ranging from 5 to 10 years or longer.

Can DST investors lose money?

Yes. DSTs carry risks including vacancy risk, market risk, sponsor risk and potential loss of principal.

Are DSTs better than owning rental property directly?

That depends on investor goals. DSTs provide passivity and diversification while direct ownership provides greater control and flexibility.

What types of properties are commonly held in DSTs?

Common DST asset types include:

• Multifamily apartments
• Industrial facilities
• Medical office buildings
• Self-storage properties
• Retail assets
• Triple net leased properties

Are DSTs only for retirees?

No. While many retirees use DSTs, they are also used by investors seeking diversification, tax deferral and passive ownership structures.

Do DSTs qualify as securities?

Yes. DST interests are generally considered securities and are typically offered through broker-dealers and registered representatives.

Can DSTs help with estate planning?

Potentially. DST interests may simplify asset division among heirs and may benefit from step-up in basis treatment under current tax law.

What happens when a DST property is sold?

When the DST property is sold, investors generally receive their proportional share of proceeds. Investors may pay taxes or potentially complete another 1031 exchange depending on their situation.