Structural Reference Memorandum

IRC §1031 & the
Delaware Statutory Trust
A structural reference for tax-deferred exchanges

Educational reference for property owners evaluating Delaware Statutory Trust structures within a §1031 exchange.

Commercial property owners  ·  Refinance decisions  ·  Debt maturity  ·  Estate transitions  ·  Passive replacement strategies

Educational reference only  ·  Not an offer of securities

§ I  ·  Exchange Framework

IRC §1031 — Statutory Authority and Mechanics

IRC §1031 permits deferral of capital gains recognition on the sale of investment real property, provided proceeds are reinvested into qualifying like-kind replacement property. The gain is deferred, not forgiven — it carries forward until a taxable disposition occurs outside a qualifying exchange structure.

§1031 is a deferral mechanism. The decision of what to exchange into is structurally independent from the decision to exchange.

§ II  ·  Statutory Timelines

Identification and Acquisition Deadlines

Two hard deadlines govern every §1031 exchange. Both are measured from the relinquished property closing date and neither is extendable by election.

45
Days
Identification Period. Written identification of replacement properties must be delivered to the Qualified Intermediary within 45 calendar days. Subject to the Three-Property Rule, 200% Rule, and 95% Exception under Treasury regulations.
180
Days
Exchange Period. Replacement property acquisition must close within 180 calendar days of the relinquished property closing, or by the federal tax return due date for the year of disposition — whichever is earlier.

A Qualified Intermediary must be engaged before the relinquished property closes. Constructive receipt of funds by the taxpayer at any point disqualifies the exchange.

§ III  ·  DST Legal Structure

Delaware Statutory Trust — Legal Structure and IRS Authority

A Delaware Statutory Trust holds direct fee title to real property. In Revenue Ruling 2004-86, the IRS confirmed that a beneficial interest in a qualifying DST constitutes like-kind replacement property for purposes of IRC §1031.

The passive structure of DST ownership is what makes it qualify as like-kind replacement property — and what eliminates management obligations for the investor.

§ IV  ·  Medical Office Real Estate

MOB Asset Class Characteristics

Medical office buildings occupy a structurally distinct position within commercial real estate — driven by healthcare delivery demand rather than consumer spending or corporate space absorption.

Medical office real estate is one of several asset classes commonly evaluated within §1031 exchange planning.

When Owners Typically Reach Out

Most conversations begin before a decision has been made.

The owners who have the most options are the ones who start this conversation before the situation forces it.

Debt and Capital
Upcoming loan maturity or refinancing pressure
Interest-only period ending
Refinancing at materially higher rates
Large embedded capital gain exposure
Ownership and Operations
Increasing management or operational complexity
Desire to reduce active ownership responsibilities
Long-term hold — considering disposition timing
Recourse exposure on current loan
Planning and Transition
Estate or generational planning under review
Succession question without a clear answer
Sale proceeds expected within 3–12 months
Evaluating passive replacement property structures
Post-Sale
Property recently sold — identification window open
Replacement property not yet identified
Exchange structure under review with advisor
Prior §1031 exchange — evaluating next structure
Program Structure

Organizational and Structural Characteristics

The following describes how this program is organized — distribution architecture, sponsor participation, asset focus, and management structure. These are structural characteristics, not performance representations.

Distribution Architecture

Direct Sponsorship Structure

Direct sponsor structure without an external broker-dealer distribution layer. Investor engagement occurs under Regulation D, Rule 506(b).

Sponsor Participation

Principal Co-Investment

Sponsor principals may invest alongside investors in the same trust structures on equivalent economic terms.

Co-investment terms are disclosed in applicable offering documents.

Asset Focus

Medical Office Real Estate

Focused exclusively on medical office real estate. Target acquisitions carry healthcare-system-affiliated or institutional-credit tenancy.

Management Structure

Third-Party Property Management

Property and asset management is conducted by independent third-party firms. Management arrangements and fees are disclosed in applicable offering documents.

Structural descriptions only. All program-specific details are governed by applicable offering documents.
Refinance vs. Redeployment

The comparison is not always hold versus sell.

In many cases the more relevant comparison is refinancing at current rates against redeploying equity through a tax-deferred replacement property structure. The analysis depends on the owner's specific basis, debt structure, and capital objectives — not on a general model.

Most owners with long-hold assets have not had this comparison structured clearly with their CPA. The after-tax cash flow on a refi at current rates versus the after-tax cash flow if capital were redeployed without a large tax event is the comparison worth running before the refinancing decision is made — not after.

Refinance Path
New loan at current rates
Active ownership continues
Capital remains in place
Deferred gain accumulates
Personal recourse typically continues
§1031 Exchange Path
Capital gain deferred
Replacement property acquired
Debt replaced at trust level
Passive or active structure
Estate interaction — CPA to model

This comparison is for structural reference only. No recommendation is made. Outcomes depend on taxpayer-specific facts and should be modeled by qualified tax and legal counsel.

Reference Topics

Common Topics in §1031 Structural Education

Questions and topic areas property owners often review when evaluating DST structures.

Fees
How are acquisition, management, and disposition fees structured across the investment lifecycle?+
Total cost reviewed across all fee types over the full hold period provides a more complete picture than any single line item.
Where do asset management fees flow, and how are recipients identified in offering documents?+
Offering documents identify the management entity, its relationship to the sponsor, and the fee structure.
Does the sponsor co-invest principal capital in the same trust structure?+
Sponsor co-investment, where present, is disclosed in offering documents along with its extent and specific terms.
Was an independent third-party appraisal obtained?+
Independent appraisals and their dates relative to trust formation are disclosed in offering documents.
Management
Who controls the disposition decision, and under what criteria?+
The trust agreement specifies the trustee's authority, conditions triggering a sale, and any hold-period extension provisions.
Do any sponsor fee structures continue or increase during an extended hold period?+
Offering documents disclose fee provisions across the stated hold and any extension scenarios.
Asset & Tenancy
What is the credit profile of the anchor tenant?+
Offering documents identify the guaranteeing entity, its corporate level, and its relationship to the operating tenant.
How does the remaining lease term compare to the stated hold period?+
A mismatch between remaining lease term and intended hold period is a relevant data point. Renewal options and their terms are also disclosed.
Sponsor Track Record
How many full-cycle transactions has the sponsor completed?+
Full-cycle completions — acquisition through investor distribution — provide a basis for evaluating execution. Realized outcomes vs. offering projections are distinct data points.
Is the sponsor a direct issuer, co-sponsor, or downstream distributor?+
The PPM identifies all parties, roles, and compensation within the offering structure.
01
Fee Architecture
Total cost across entry, hold, and exit
—Front-end load: origination, syndication, distribution
—Ongoing: asset management fee, recipient, affiliation
—Disposition: sale fee, promote, profit participation
02
Economic Alignment
Structural relationship between sponsor and investor economics
—Principal co-investment: presence, extent, terms
—Management independence and conflict disclosure
—Disposition trigger criteria and economic neutrality
03
Asset Profile
Underlying real estate characteristics
—Tenant credit profile and guaranteeing entity
—Remaining lease term vs. hold period
—Physical condition, capex history, deferred maintenance
04
Debt Structure
Financing terms and maturity alignment
—LTV and senior lender identity
—Fixed vs. floating; interest rate cap provisions
—Debt maturity vs. planned disposition timeline
05
Sponsor Track Record
Full-cycle completions and realized outcomes
—Full-cycle count: acquisition through investor distribution
—Realized outcomes relative to offering projections
—Performance through at least one market disruption period
06
Distribution Architecture
Intermediary structure and fee transparency
—Direct issuer, co-sponsor, or downstream distributor
—Dealer manager and BD intermediary layer
—Fee flow transparency from investor capital to asset
Common Questions

Common questions about §1031 exchanges and DST structure.

How does distribution structure affect fee composition?+
DST programs are generally organized through one of two distribution structures. Traditional sponsor programs are distributed through broker-dealer networks and include compensation at multiple distribution levels — dealer manager, wholesaler, and registered representative. Direct sponsor programs engage investors without a BD intermediary layer, which results in a different fee composition. Total cost across all fee types is disclosed in applicable offering documents and should be reviewed prior to any commitment. The appropriate structure for any investor depends on individual circumstances and should be evaluated with qualified advisors.
Where do asset management fees flow, and are recipients affiliated with the sponsor?+
Asset management fees may be paid to a sponsor-affiliated entity or to an independent third-party manager. Where management fees flow to an affiliated entity, a structural relationship exists between management revenue and operational decisions throughout the hold period. The identity of the management entity, its affiliation status, and the fee structure are disclosed in applicable offering documents.
What is the typical hold period, and who controls the disposition decision?+
Most DSTs are structured with an intended hold of five to seven years — this reflects operational intent, not a guarantee of timing. Beneficial owners hold passive interests and do not participate in disposition decisions. The trust agreement specifies the trustee's authority to initiate a sale, the conditions governing that determination, and any provisions permitting hold period extension. Investors should review those provisions carefully in offering documents.
What does principal co-investment mean structurally?+
Principal co-investment refers to the sponsoring entity acquiring beneficial interests in the same trust on the same economic terms as investors — subject to the same hold, the same exit, and the same distribution structure. This produces shared economic exposure at the asset level. Co-investment is not a uniform characteristic of DST programs generally; its presence, extent, and terms are disclosed in offering documents.
Does a DST investor carry personal liability for the trust's debt?+
Under standard DST structure, the mortgage is held at the trust level. Beneficial owners are not party to the loan, do not execute personal guarantees, and carry no personal liability for trust debt obligations in the typical structure. Specific debt and liability terms should be confirmed in the applicable trust agreement and offering documents.
Who may hold DST beneficial interests?+
DST beneficial interests are securities under federal law and are offered only to accredited investors as defined by the SEC under Regulation D. Accredited status is established through income thresholds, net worth thresholds, or qualifying professional certifications. This is a regulatory requirement applicable to all DST offerings.
Are DST interests liquid?+
No. DST beneficial interests are illiquid securities with no established secondary market. Transfer is subject to significant restrictions under applicable securities law and the trust agreement. Investors should treat a DST commitment as capital locked for the duration of the stated hold period. Illiquidity is a material characteristic that should be evaluated in the context of an investor's overall financial circumstances and liquidity requirements.
Can DST interests be held through a self-directed retirement account?+
DST interests may in certain circumstances be held through self-directed IRAs or other qualified retirement accounts. The §1031 exchange tax deferral benefit does not apply to assets held within retirement accounts — those accounts are governed by separate tax treatment under the IRC. UBTI implications, custodian requirements, and applicable tax treatment should be reviewed with a qualified tax advisor before proceeding.
What track-record signals are relevant when reviewing a DST sponsor?+
Full-cycle transaction count — acquisitions taken through to investor distribution — provides a basis for evaluating operational and exit execution. Realized outcomes relative to offering projections, and performance through at least one market disruption period, are additional data points. The sponsor's role within the offering structure (direct issuer, co-sponsor, or downstream distributor) is relevant context and is disclosed in the PPM.
At DST disposition, can investors independently elect a new §1031 exchange?+
Yes. Upon disposition, each beneficial owner receives their pro-rata share of net proceeds and may independently elect a new §1031 exchange into any qualifying replacement property — another DST, a direct acquisition, or another qualifying structure. There is no obligation to reinvest with the original sponsor. The exchange must be properly structured through a QI and must satisfy all applicable identification and acquisition deadlines.
How does §1031 exchange deferral interact with estate planning?+
Successive §1031 exchanges permit indefinite deferral of recognized gain through continuous reinvestment. Under current federal tax law, assets held at death may receive a step-up in cost basis, potentially eliminating accumulated deferred gain. This outcome depends on estate law as it exists at the time of the decedent's passing and remains subject to legislative change. Investors should review the interaction of §1031 deferral with their specific estate planning objectives with qualified estate and tax counsel.
For additional review, request the §1031 Reference Packet.
Planning Discussion

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Educational discussion covering exchange timing, DST structure, and program organization. No offering materials provided.

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