Drafting a DST Master Lease

A DST is a separate legal entity created as a trust under Delaware law. The importance of DSTs in connection with like-kind exchanges can be traced to Rev. Rul. 2004-86, in which the IRS ruled that an interest in a DST constituted good replacement property in an otherwise qualifying like-kind exchange involving real estate. (Note: This article focuses on the use of DSTs as part of like-kind exchanges, and particularly on syndicated offerings of DST interests to investors looking to engage in a like-kind exchange. DSTs obviously have a variety of uses outside this context to which the limitations discussed in this article may not be relevant.) This conclusion was based on the fact that: 1) the restrictions on the powers of the DST described in the ruling caused it to be classified as a trust rather than as an association or partnership for tax purposes; and 2) the trust should be disregarded for U.S. federal income tax purposes.

Under existing rules, the exchange of a beneficial interest in a trust, corporation or partnership for real estate or a similar beneficial interest in a trust, corporation or partnership does not qualify as a like-kind exchange, even if the sole asset of such entity consists of real estate. Because the provisions of the trust in Rev. Rul. 2004-86 caused it to be treated as a disregarded entity for U.S. federal income tax purposes, the acquisition of a beneficial interest in the DST, which owned rental real estate, was treated as an acquisition of an undivided interest in the underlying real estate held by the DST. Investors that had sold real estate could therefore acquire interests in a DST as replacement property in an otherwise qualifying like-kind exchange.