As a dentist, you understand the importance of strategic planning for your financial future.
While your expertise lies in patient care and running your practice, real estate can be a significant part of your investment portfolio.
If you own your practice building or other investment property, one tool worth understanding is the Delaware Statutory Trust (DST). It is not right for everyone, and it comes with real tradeoffs — so this post covers how it works, what the IRS requires, and what you give up.
What is a Delaware Statutory Trust (DST)?
A DST is a legal structure that allows multiple investors to co-own a single property or portfolio of properties. The IRS has held that a beneficial interest in a properly structured DST is treated as a direct interest in the underlying real estate, which is what allows it to be used as replacement property in a 1031 exchange (Rev. Rul. 2004-86).
That structure comes with strict conditions. To preserve the tax treatment, the trustee’s powers are deliberately limited — the trust generally cannot sell and reinvest in a new property, renegotiate leases or financing, make structural changes, or accept new capital (Rev. Rul. 2004-86). In practical terms: as an investor, you have no say in how the property is run or when it is sold. Within those limits, a DST can give you a fractional interest in larger, institutional-grade properties that might otherwise be out of reach — multifamily apartments, retail centers, industrial buildings, or medical office space.
Why Some Dentists Look at DSTs
1. Diversification of Assets — Just as you’d recommend a balanced approach to oral hygiene, a balanced investment portfolio matters to your financial health. Many dentists own property — perhaps your office building or a rental home.
Concentrating in one property type or one region can leave you exposed to a single local market. DSTs can let you spread a 1031 exchange across several property types and geographic regions. Diversification may reduce the impact of any one market, but it does not eliminate risk, and it does not protect against loss.
2. Shift to Passive Management — Running a dental practice is demanding, and actively managing real estate adds to your workload.
With DSTs, property management is handled by the sponsor and its managers. That means no tenant calls, maintenance issues, or day-to-day headaches. The flip side is the same coin: you are relying entirely on the sponsor’s judgment and execution, and you cannot step in if you disagree with it.
3. Tax Deferral — A 1031 exchange into a DST can defer capital gains tax when you sell appreciated real property and reinvest in like-kind real property. Note the word defer: the IRS is explicit that gain in a like-kind exchange “is tax-deferred, but it is not tax-free” — your deferred gain carries over into the basis of the replacement property and is generally taxed when you eventually sell without exchanging again.
Deferring the tax can leave more capital working in the replacement property. It also means the tax bill hasn’t gone away — it has moved.
The Rules You Have to Follow
A 1031 exchange is unforgiving on procedure. The essentials, per the IRS:
- Real property held for business or investment only. Since the Tax Cuts and Jobs Act, section 1031 applies to real property only — not equipment, and not your home. Your practice building or a rental property qualifies; your personal residence does not.
- 45 days to identify. You have 45 days from the sale of the relinquished property to identify replacement property in writing. This deadline is not extendable except in presidentially declared disasters.
- 180 days to close. The exchange must be completed within 180 days of the sale, or by your tax return due date, whichever comes first.
- You cannot touch the money. A qualified intermediary must hold the proceeds. Taking control of the cash before the exchange is complete can disqualify the entire transaction and make the full gain taxable immediately. Your own accountant or attorney generally cannot serve as your intermediary.
- Cash and debt relief create tax. If you receive cash, or if the debt on your replacement property is less than the debt you paid off, that difference (“boot”) is generally taxable. Depreciation recapture also applies to the extent gain is recognized.
This is why the sequencing matters: the intermediary has to be engaged and the exchange structured before you close on the sale. After the fact is too late.
The Major Types of Real Estate Assets in DSTs
DSTs hold a range of commercial property types, each with its own dynamics and its own risks:
- Multifamily Housing: Residential demand tends to be less cyclical than other commercial categories, though performance still varies by market, and rent regulation and supply cycles can affect returns.
- Industrial Properties: Demand has been driven in part by e-commerce and distribution needs, though the sector is sensitive to construction cycles and tenant concentration.
- Retail Spaces: Performance varies widely by format and location; grocery-anchored centers have historically held up better than general retail, but that is not a guarantee.
- Office Buildings: Office has been the most challenged commercial category since the shift to remote and hybrid work, and vacancy and financing conditions vary sharply by submarket.
- Hotels: Hospitality is the most operationally sensitive of these categories, with income that can swing significantly with travel demand and the economic cycle.
We have deliberately kept this general. Sector conditions change quickly, and any specific claim about which property type is “performing well” right now would be out of date before you read it — and shouldn’t be the basis for an investment decision anyway.
An Example of a 1031 Exchange Using DSTs
Imagine you own the building that houses your dental practice, and it has appreciated significantly in value. You are retiring, selling the practice, and no longer want to be a landlord to the dentist who bought it.
Selling it outright would trigger capital gains tax and depreciation recapture. By exchanging into a DST instead, you might: defer that tax; spread the investment across several properties and asset types; and hold a passive position rather than managing a building. Whether any of that is a good idea depends on your tax picture, your liquidity needs, and your timeline — not on the structure itself.
For instance, your investment might include a share of a multifamily complex in one state, a retail center in another, and an industrial property elsewhere.
What You Give Up
DSTs are private placements. They are securities, and they carry meaningful limitations that a dentist should understand before the 45-day clock is running:
- They are generally restricted to accredited investors. DST interests are typically offered under private-placement exemptions, which means you usually must meet SEC accredited-investor thresholds to participate at all.
- They are illiquid. There is no meaningful secondary market. Plan on your capital being committed for the life of the offering — often five to ten years — with no reliable way to get out early if your circumstances change.
- You have no control. As described above, the trustee’s powers are restricted by design. You do not vote on leases, capital improvements, refinancing, or the timing of a sale.
- You can lose money. Distributions are not guaranteed, can be reduced or suspended, and are not the same as yield. Real estate values can fall, tenants can default, and you can lose some or all of your principal.
- Costs matter. Sponsor fees, acquisition loads, and ongoing expenses reduce your return and are not always obvious in the marketing materials. Read the private placement memorandum, and have someone independent read it with you.
Is a DST Right for You?
Every dentist’s situation is different. A DST may be worth evaluating if you are selling appreciated investment real estate, you want out of active management, you can commit the capital for years, and the deferred tax is large enough to justify the tradeoffs.
It is probably not the right tool if you may need the money, if you want a say in how the property is run, if the tax you would defer is modest relative to the fees, or if the exchange would push you into an investment you would not otherwise choose. Deferring tax is not a good enough reason on its own to buy something.
Here at Core Advisors, we help dentists think these decisions through. Because our tax, accounting, and wealth management teams work together under one roof, a question like this doesn’t get answered in isolation — the tax deferral, your retirement income plan, and the sale of your practice are all part of the same conversation, with the same team.
If you’re weighing a property sale and want to understand your options — including whether a 1031 exchange makes sense at all — schedule a call. We’ll walk through the numbers with you before any deadline starts running.
This article is for educational purposes only. It is not tax, legal, or investment advice, and it is not an offer or solicitation to buy any security. Delaware Statutory Trust interests are illiquid private placements, are generally available only to accredited investors, involve substantial fees, and carry risk including possible loss of principal; distributions are not guaranteed. 1031 exchange rules are strict and deadlines are not extendable — consult your own tax, legal, and financial advisors about your specific situation before acting.
