Delaware Statutory Trust vs Deferred Sales Trust Know Which DST You're Being Sold

If you have started looking into how to defer the tax on a land sale, you have probably run into the letters “DST” attached to two completely different products. They are not the same thing, and the confusion costs landowners real money.

• Delaware Statutory Trust. A real estate ownership structure the IRS recognizes as qualifying replacement property for a 1031 exchange. This is the one Iron Ridge works with for farm and ranch sellers.
• Deferred Sales Trust. A separate strategy built on the installment sale rules of Internal Revenue Code Section 453, where the seller sells to a trust that then resells the asset and pays the seller over time.

Same three letters. Different law, different mechanics, different risk profile. Here is how to tell them apart.

1031 exchanges and Delaware Statutory Trusts available through private placements are highly speculative, illiquid securities and involve substantial risk, including the possible loss of all principal invested.

A Delaware Statutory Trust is a trust that holds investment real estate, whose beneficial interests the IRS treats as direct interests in real property under Revenue Ruling 2004-86. That lets a DST interest serve as replacement property in a Section 1031 exchange, which may defer the gain on the land you sold. Complexity and restrictions within a 1031 exchange program may significantly impact desired tax deferral outcomes.

A Deferred Sales Trust is a third party trust that buys your property for an installment note, resells it to the end buyer, and pays you over time under Section 453. You own a promise to be paid, not real estate, and you report the gain as payments arrive.

What a Delaware Statutory Trust is

A Delaware Statutory Trust lets you sell appreciated farmland or ranchland and roll the proceeds into a professionally managed real estate trust through a 1031 exchange. The IRS recognized this use in Revenue Ruling 2004-86, so a DST interest counts as qualifying replacement property.

In practice that means:

• You sell your land and a qualified intermediary holds the proceeds.
• You identify the DST interest within 45 days and close within 180 days.
• The federal capital gains tax that a direct sale would trigger is deferred under 1031 rules for as long as you stay inside those rules.
• You hold a fractional, beneficial interest in a trust that owns institutional scale real estate, often spread across several properties, with the potential for monthly income.

The legal footing is well established. The 1031 exchange has been in the tax code for decades, and Revenue Ruling 2004-86 specifically blessed the DST structure as replacement property.

What a Deferred Sales Trust is

A Deferred Sales Trust is a different animal. It does not run through the 1031 exchange rules at all. Instead it relies on the installment sale provisions of Section 453.

The general idea, as it is marketed: you sell your asset to a trust in exchange for an installment note, the trust sells the asset to the final buyer, and you receive payments over a period of years. Because you are paid over time rather than all at once, the tax on the gain is reported as the installments come in rather than entirely in the year of sale.

A few things landowners should understand before they take that at face value:

• A Deferred Sales Trust is a promoted strategy, not a structure the IRS has blessed by name the way it blessed the DST in Revenue Ruling 2004-86. It leans on a general reading of the installment sale rules.
• It spreads and delays the tax through the timing of installment payments. That is a different thing from the 1031 deferral mechanism a Delaware Statutory Trust uses.
• Different promoters structure these arrangements in different ways, and the IRS has scrutinized aggressive installment sale arrangements in the past.

Which one is a 1031 exchange?

Only the Delaware Statutory Trust. A DST interest can be the replacement property in a Section 1031 exchange. A Deferred Sales Trust is not a 1031 exchange at all. It is an installment sale, governed by different rules from start to finish. Three differences matter most:

• Basis. In a 1031 exchange your old basis carries over under Section 1031(d), and heirs may receive a stepped up basis under Section 1014 that can wipe out the deferred gain.
• Paying the tax. In a Deferred Sales Trust you pay tax on each installment as it arrives, and ordinary income depreciation recapture under Sections 1245 and 1250 is generally taxed in the year of sale under Section 453(i).
• Death. Unpaid installment notes are generally income in respect of a decedent under Section 691, so heirs still owe the tax. No step up erases it.

If you want to see how other non 1031 paths compare, we walk through a structured sale versus a DST and an installment sale versus a DST on farmland.

What has the IRS said about each one?

For the Delaware Statutory Trust, Revenue Ruling 2004-86 sets out the conditions a DST must meet for its interests to count as real property in a 1031 exchange.

For the Deferred Sales Trust, there is no published ruling that blesses the structure. In 2023 the Treasury and IRS proposed regulations (REG-109348-22) that would treat monetized installment sales, a related but distinct strategy, as listed transactions. Those regulations remain proposed. In the preamble, the IRS said it intends to challenge those transactions, arguing among other things that an intermediary who buys and almost simultaneously resells the property to the seller’s chosen buyer is not a bona fide purchaser. We are not aware of any published court opinion approving a Deferred Sales Trust by name.

Side by side

	Delaware Statutory Trust	Deferred Sales Trust
Governing law	The 1031 exchange and Revenue Ruling 2004-86	The installment sale rules of Section 453
IRS recognition by name	Recognized as 1031 replacement property	No ruling blessing the structure by name
What you end up holding	A beneficial interest in managed real estate	An installment note from a trust
How the tax is handled	Deferred under 1031 rules	Reported over time as installments are paid
Basis and death	Old basis carries over; heirs may get a Section 1014 step up	Unpaid installments taxed to heirs as income in respect of a decedent; no step up on that gain
Published IRS guidance	Revenue Ruling 2004-86	No published ruling; 2023 proposed regulations target related monetized installment sales
Liquidity	Illiquid; you generally wait for the trust to sell the property, often years	Paid on the note schedule; you cannot simply call back the principal
Fees	Offering and ongoing management costs disclosed in the private placement memorandum	Trustee, setup and investment management fees that vary by promoter
Who regulates it	Sold as a securities offering through FINRA member broker dealers	No single regulator oversees the structure itself
Accredited investor rule	Generally limited to accredited investors	Not generally required for the seller

What are the limits of a Delaware Statutory Trust?

DST interests are illiquid; expect to hold until the sponsor sells, possibly for many years. They are for accredited investors only, and you give up control over leasing, selling and financing. You take on sponsor risk, property level risk and financing risk, since a trust loan can magnify losses. Potential monthly income is not guaranteed, and distributions may be reduced or suspended. Fees reduce returns, the tax rules are complex, and DST interests are securities that can lose all of their value. See the risks of DST investing, the pros and cons of DSTs for landowners and how a land sale is taxed.

Why the confusion matters for a farm or ranch sale

When you are selling ground that has appreciated for generations, the difference between these two is not academic. They sit on different parts of the tax code, they leave you holding different things at the end, and they carry different levels of regulatory certainty. A landowner who thinks they are doing one when they are actually doing the other can end up surprised.

Our view is simple. We work with the Delaware Statutory Trust because it rests on long established 1031 law and a specific IRS ruling, it is a regulated securities offering handled through licensed representatives, and every offering we bring to a client has been through independent third party due diligence. We are not in the business of the Deferred Sales Trust, and we are not the right people to evaluate one for you. If someone is pitching you a “DST,” the first question to ask is which one they mean.

We advise. We are not a sponsor and do not issue these investments. If you want a straight read on which path fits your sale, let’s have a visit.

1031 exchanges and Delaware Statutory Trusts available through private placements are highly speculative, illiquid securities and involve substantial risk, including the possible loss of all principal invested. Complexity and restrictions within a 1031 exchange program may significantly impact desired tax deferral outcomes. Potential monthly income from such investments is not guaranteed and distributions may be reduced or suspended. DST 1031 properties are only available to accredited investors and accredited entities. This material has been prepared for educational purposes only, is not to be interpreted as tax or legal advice, and does not constitute an offer to sell securitized real estate investments. Investors are advised to speak with their own tax and legal advisors regarding their particular situation. Securities offered through Arkadios Capital, LLC, Member FINRA / Member SIPC. Advisory Services through Arkadios Wealth. Iron Ridge and Arkadios do not share any ownership.