DST Lawyer: Delaware Statutory Trust and 1031 Exchange Investment Losses

What Is a DST?

A DST is a trust that owns real estate, such as apartments, senior housing, storage, medical offices or retail space, and sells fractional "beneficial interests" in it to investors. The Internal Revenue Service ("IRS") ruled in 2004, in Revenue Ruling 2004-86, that an interest in a properly structured DST can count as real estate for a tax-deferred 1031 exchange. DSTs are now sold widely to people who have just sold a rental property.

DST interests are securities. Almost all are sold as private placements under the Securities and Exchange Commission's ("SEC's") Regulation D ("Reg D"), mostly to "accredited investors," through brokerage firms that earn commissions on the sale. The offering document is a private placement memorandum ("PPM") written by the sponsor and typically not reviewed by any regulator.

Why the 1031 Clock Creates Pressure

A 1031 exchange runs on a tight schedule. After you sell, you generally have 45 days to identify replacement property and 180 days to close. DSTs are marketed as a way to beat that clock, because the sponsor has already bought the property and you can buy in within days.

That pressure is why the recommendation matters. An investor racing a deadline may not read a long PPM closely, or be told that paying the tax, or buying something easier to sell, could be a reasonable choice. Deferring tax is a real benefit, but it does not justify an investment that is not in your best interest.

How DSTs Are Built, and Why That Matters When Things Go Wrong

To keep its tax status, a DST must stay passive. Under Revenue Ruling 2004-86, the trustee generally cannot raise new money from investors, take on new loans or refinance, renegotiate leases or enter new ones (except in a tenant's bankruptcy or insolvency), or reinvest sale proceeds. Those rules are why DSTs are often described as having "handcuffs."

To work around them, many DSTs lease the whole property to a "master tenant," often an affiliate of the sponsor, which runs the property and pays rent to the trust. That puts a lot of weight on one company:

• Single-sponsor risk. Your income depends on the sponsor and its master tenant. A problem at the top can hit every deal the sponsor runs.

• Leverage. Many DSTs use a large mortgage. If rents fall or the loan comes due, the lender may have the right to step in.

• Few ways to fix problems. A struggling DST that cannot raise money or refinance may have to convert into a different entity, find a new sponsor, or sell.

• Receivership and foreclosure. When a loan defaults, the lender can ask a court to appoint a receiver to run and sell the property. Investors are typically last in line, behind the lender.

The Hidden Cost: Loads, Fees and Markups

DSTs can carry substantial upfront fees and commissions that reduce the amount actually invested. The PPM's "estimated use of proceeds" table usually shows how much of your money goes to selling commissions, dealer-manager and due diligence fees, offering and organization costs, acquisition fees, and financing costs, before a dollar goes into the property. Some sponsors also buy the property first and sell it to the DST at a higher price. Ongoing asset management fees, a share of the profits and fees on the eventual sale come on top.

That means the property must rise in value just for you to break even. Ask for and review the PPM's fee disclosure; the size of those costs matters under the rules described below.

Illiquidity: No Easy Way Out

DST interests are not listed on any exchange, and there is generally no market to sell them into. Sponsors usually plan to hold the property for years, and you typically cannot cash out early. If the property is sold at a loss or the lender forecloses, you may lose much of your money and still face a tax bill, because a foreclosure can itself be a taxable event.

Sponsor Failures, Receiverships and Bankruptcies

These are not theoretical risks. In February 2026, Inspired Healthcare Capital, a senior housing sponsor, and its affiliates filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Texas. The company said the entities that control its DSTs were part of the restructuring, and the U.S. Trustee later appointed an official committee to represent DST investors in the case. Other DST properties around the country have gone into lender-driven receiverships or foreclosure in the past few years.

Why a Sponsor's Bankruptcy Does Not End Your Claim Against the Brokerage Firm

Many investors assume a sponsor's bankruptcy leaves them only a claim in that case. Often it does not.

• The firm that sold you the DST is a separate company. A claim against a brokerage firm rests on its own conduct: whether it reasonably investigated the offering, whether it told you the truth, and whether the DST was in your best interest. The bankruptcy's automatic stay generally protects the company in bankruptcy, not the separate firms that sold its investments.

• Bankruptcy plans have limits. In Harrington v. Purdue Pharma (2024), the U.S. Supreme Court held that the Bankruptcy Code does not authorize a Chapter 11 plan to release claims against non-debtors without the affected parties' consent.

• Read every form before you sign it. Ballots, opt-out forms, settlement offers and releases in a bankruptcy or receivership can affect your rights. Get advice before you sign anything.

Which Rules Apply?

Under the SEC's Regulation Best Interest ("Reg BI"), a brokerage firm and its financial advisors must act in your best interest when they recommend an investment, and may not put their own interests ahead of yours. That includes understanding the product's risks, rewards and costs, and having a reasonable basis to believe it is in your best interest given your age, goals, finances and risk tolerance. The SEC has made clear that cost must always be considered, and that a firm generally should consider reasonably available alternatives. For private placements, SEC staff say firms generally should apply heightened scrutiny and ask whether lower-risk or less complex options could meet the same goals. Reg BI protects accredited investors too.

Brokerage firms must also reasonably investigate any private placement they recommend. In Regulatory Notice 23-08, FINRA reminded firms that this means, at a minimum, looking into the issuer and its management, business prospects and assets, the claims being made and how the money will be used. Firms should also consider the issuer's regulatory and litigation history, payments to the sponsor's affiliates and cherry-picked past performance, and not rely solely on what the issuer says. For a DST, that means asking hard questions about the sponsor's finances, the master tenant, the loan terms and the price the sponsor paid for the property. Under FINRA Rule 5123, a firm that sells a private placement generally must file the offering documents and any sales materials with FINRA within 15 calendar days of the first sale. Firms must also supervise their financial advisors and act on red flags.

Common Claims in DST Cases

• Reg BI violations: a DST, or several DSTs, that was not in your best interest given your age, goals, need for access to your money, or its cost compared with reasonably available alternatives.

• Failure to investigate: a firm that sold a DST without reasonably investigating the sponsor, the master tenant or the debt, or that ignored red flags.

• Misrepresentation and omission: a DST described as "safe," "guaranteed income" or "like owning your own building," or one whose fees, leverage and lock-up were never explained. See fraud and misrepresentation.

• Overconcentration: most of your exchange proceeds placed with one sponsor, one property type or one tenant.

• Breach of fiduciary duty: an advisor who put its own compensation ahead of your interests. See breach of fiduciary duty.

• Failure to supervise: a firm that let a financial advisor keep selling the same sponsor's DSTs after warning signs appeared.

When many investors bought the same DSTs through the same financial advisor or firm, see group cases.

Warning Signs in Your Account

• Your monthly distributions were cut or suspended.

• You received a letter about a loan default, a replacement sponsor, a conversion to an LLC, a receiver or a bankruptcy.

• Most or all of your exchange proceeds went to one sponsor.

• No one explained what the DST cost you up front, or what the sponsor paid for the property.

• You are retired or nearing retirement and cannot get your money out. See poor retirement advice and senior fraud and elder abuse.

How Brokerage Firms Defend These Cases

Daren spent years on the defense side, so he knows the playbook:

• "The risks were in the PPM." Written disclosures matter, but they do not automatically defeat a claim. FINRA has cited decisions holding that written disclosures in an offering memorandum do not excuse misleading oral statements.

• "The sponsor failed, not us." Even if the sponsor went bankrupt, the question is whether the firm reasonably investigated the offering, and whether it should have been recommended to you at all.

• "You wanted the tax deferral." Wanting to defer taxes does not make every DST, in any amount, in your best interest.

Documents That Help

• The PPM, any supplements, the subscription agreement and any sales materials

• Your 1031 exchange paperwork and closing statements

• Account statements, distribution notices and sponsor updates

• Notices about loan defaults, receivers, bankruptcy, ballots or releases

• Account opening forms and risk profiles, including any accredited investor questionnaire

• Emails, texts and your notes of calls with your financial advisor

Deadlines

Under FINRA Rule 12206, a claim cannot be brought in FINRA arbitration once six years have passed since the event that gave rise to it. Other legal deadlines can be much shorter, and bankruptcy cases set their own deadlines for filing claims and returning ballots. If you suspect a problem, talk to a lawyer promptly.

Why Investors Choose Daren A. Luma

Daren has 26 years of extensive experience in litigation, arbitration and regulatory matters involving the financial industry. He worked for 10 years at one of the largest defense law firms in the world, representing financial firms in litigation, arbitration and regulatory matters, and before that served as in-house counsel at one of the largest brokerage firms. He has seen how brokerage firms review customer complaints and build their defenses, and he now uses that experience for investors. Since founding the firm in 2018, he has represented over 400 clients and recovered over $130mm for investment victims. Prior results do not guarantee a similar outcome. He personally handles each case from start to finish.

• Strong Reputation — Over 26 years of practice specialized in the financial industry. I’ve achieved successful results in a wide variety of legal forums. Since 2018, I have represented over 400 investment victims and successfully recovered over $130 million for them.

• Individualized Attention — At my firm, unlike some securities litigation firms, you can trust that your case will be handled from start to finish by me instead of being handed off to a lower-level associate without the requisite knowledge or experience.

• Strategic Counsel — With experience as in-house counsel within a large brokerage firm and 10 years with one of the largest (defense) law firms in the world, I offer clients a well-rounded perspective on their investment loss issue. From there, my firm develops a comprehensive plan to achieve the best possible outcome.

Fees

Your first consultation is free and carries no obligation. Investor cases are handled on a contingency fee basis, with no hourly fees, and the firm is paid only if you recover.* How case costs and expenses are handled depends on the case and the client, and is discussed at your free consultation. In FINRA arbitration, each side generally pays its own lawyer and an award of attorney's fees is not automatic, which makes choosing the right lawyer even more important.

More on Private Placements and Alternative Investments

DSTs are a type of private placement. See private placements, non-traded real estate investment trusts ("REITs") and business development companies ("BDCs") and alternative investments for the other products we handle, or read about non-traded BDC redemption limits.

Frequently Asked Questions

The DST sponsor filed for bankruptcy. Can I still recover anything?

Possibly. A claim in the bankruptcy is one path, but it is often not the only one. If a brokerage firm recommended the DST, you may have a separate claim against that firm in FINRA arbitration based on its own conduct. Talk to a lawyer before you vote on a plan or sign a release.

I did a 1031 exchange to avoid taxes. Doesn't that mean the DST was right for me?

Not necessarily. The tax deferral is one factor. The question is whether this DST, in this amount, was in your best interest given its costs, its risks and how long your money would be tied up, compared with other reasonable choices.

What if I still own the DST?

You may still have a claim. Many investors still hold their DST interests when they bring a claim, often because they cannot sell. How the loss is measured then depends on the case.

Lost Money in a DST?

If a financial advisor sold you a Delaware Statutory Trust that was not in your best interest, talk to Daren before a deadline passes. Call (914) 304-4051 or request a free consultation. The consultation is free, and investor cases are handled on a contingency fee basis, with no hourly fees: the firm is paid only if you recover.*

*Investor cases are handled on a contingency fee basis, with no hourly fees. How case costs and expenses are handled depends on the case and the client, and is discussed at your free consultation.

Attorney Advertising. Prior results do not guarantee a similar outcome. This page provides general information, not legal advice, and contacting the firm does not create an attorney-client relationship. Responsible attorney: Daren A. Luma, Daren A. Luma, PLLC, 75 South Broadway, Suite 400, White Plains, NY 10601, (914) 304-4051.

Apartment complex photo: Nyttend, public domain, via Wikimedia Commons. DST structure diagram: Daren A. Luma, PLLC (original).