How Delaware Statutory Trusts (DSTs) Provide Truly Passive Real Estate Income for Los Angeles Investors
Delaware Statutory Trusts offer Los Angeles real estate investors a completely passive income solution through professionally managed, institutional-grade properties while maintaining 1031 exchange tax benefits and eliminating landlord responsibilities.
What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust is an investment vehicle that pools investor funds to purchase large-scale commercial real estate properties. For Los Angeles investors seeking passive real estate income, DSTs eliminate the traditional burdens of property ownership while providing exposure to institutional-quality assets like apartment complexes, office buildings, retail centers, and industrial facilities.
Unlike direct property ownership or Real Estate Investment Trusts (REITs), DST investors hold beneficial interests in specific properties, making them eligible for 1031 like-kind exchanges—a crucial advantage for California investors facing high state capital gains taxes.
How DSTs Create Truly Passive Real Estate Investment
Complete Management Outsourcing
DST sponsors handle every aspect of property operations, including tenant relations, maintenance, capital improvements, financial reporting, and strategic decision-making. Los Angeles investors receive monthly or quarterly distributions without any involvement in day-to-day operations, making DSTs ideal for busy professionals, retirees, or anyone seeking hands-off real estate exposure.
Professional Property Management
Experienced DST sponsors typically manage portfolios worth hundreds of millions of dollars, leveraging economies of scale, institutional relationships, and professional expertise that individual investors cannot access. This professional management often results in higher occupancy rates, better tenant quality, and more efficient operations than individual ownership.
Key Benefits of DST Investments for Los Angeles Investors
Tax Advantages Through 1031 Exchanges
DSTs qualify as like-kind property for Section 1031 exchanges, allowing Los Angeles property owners to defer both federal and California state capital gains taxes. With California's capital gains rate reaching 13.3%, this tax deferral represents significant savings for LA investors selling appreciated properties.
Geographic Diversification
Los Angeles investors can diversify beyond California's expensive real estate markets by accessing properties in growing markets like Texas, Florida, Arizona, and the Southeast, where rental yields may be higher and property values more affordable.
Institutional-Quality Properties
DST properties typically include large-scale assets like 200+ unit apartment complexes, Class A office buildings, or major retail centers—properties generally unavailable to individual investors due to high purchase prices and management complexity.
Predictable Cash Flow
Many DST investments target annual cash distributions in the 4-7% range, providing steady income streams. Properties are often purchased with conservative leverage and established tenant bases to support consistent distributions.
No Landlord Responsibilities
DST investors avoid tenant calls, maintenance issues, vacancy concerns, and property management headaches while still benefiting from real estate ownership and potential appreciation.
Understanding DST Risks and Limitations
Illiquidity Considerations
DST investments are typically illiquid for 5-10 years until the sponsor decides to sell the property. Investors cannot force a sale or easily exit their investment, making DSTs suitable only for long-term investment horizons.
Limited Control
Investors surrender all decision-making authority to the DST sponsor, including decisions about property improvements, refinancing, or sale timing. This passive structure, while convenient, means investors cannot influence property operations or exit strategies.
Fee Structure
DST investments often include acquisition fees, asset management fees, and disposition fees that may be higher than direct property ownership. These fees can impact overall returns and should be carefully evaluated.
Market and Property Risk
DST returns depend entirely on the performance of underlying properties and local market conditions. Economic downturns, tenant departures, or market shifts can significantly impact distributions and final sale proceeds.
Who Should Consider DST Investments?
DSTs are particularly suitable for Los Angeles investors who:
Own appreciated rental properties and face significant capital gains taxes
Want to transition from active to passive real estate investing
Seek geographic diversification beyond California markets
Prefer professional management over self-management
Have long-term investment horizons (5-10+ years)
Meet accredited investor requirements
Real-World DST Investment Example
A Los Angeles couple sold their Sherman Oaks duplex for $1.8 million, realizing a $900,000 capital gain. Instead of paying approximately $200,000 in combined federal and California capital gains taxes, they invested $1.8 million across three DST properties: a Texas multifamily complex, a Florida industrial facility, and an Arizona retail center. They now receive approximately $7,500 monthly in passive distributions while deferring all capital gains taxes and gaining exposure to three different property types and markets.
DST vs. Other Passive Real Estate Investments
DST vs. REITs
Unlike REITs, DSTs provide direct property ownership benefits, 1031 exchange eligibility, and potential for greater tax advantages through depreciation and eventual sale treatment.
DST vs. Real Estate Crowdfunding
DSTs typically involve larger, institutional-quality properties with experienced sponsors, while crowdfunding platforms may offer smaller deals with varying sponsor experience levels.
DST vs. Triple Net Lease Properties
DSTs provide broader diversification across multiple properties and markets, while triple net lease investments typically involve single properties with concentrated risk.
Working with DST Sponsors and Advisors
Successful DST investing requires partnering with experienced sponsors with strong track records, conservative underwriting, and transparent fee structures. Los Angeles investors should also work with qualified financial advisors familiar with 1031 exchanges and DST structures to ensure proper investment selection and tax compliance.
Ready to explore passive real estate income through DST investments? Contact experienced Los Angeles real estate professionals to discuss how Delaware Statutory Trusts can help you defer taxes, reduce management responsibilities, and diversify your real estate portfolio while maintaining steady passive income streams.
About the Author
Justin Borges, leader of The Borges Real Estate Team at eXp Realty, is Los Angeles’s go-to realtor for 1031 exchanges and DST investments. With over $200M in sales, Justin helps property owners defer capital gains taxes, identify replacement properties, and transition into passive income strategies with clarity and confidence.
