How does the debt stack work on a DST 1031 exchange?

DST debt stack mechanics for 1031 exchange investors

DST structure overview: a Delaware Statutory Trust holds a single property (or a small portfolio) and is qualified by the IRS as a like-kind exchange replacement under IRS Revenue Ruling 2004-86. The DST pre-arranges all debt at trust formation; investors then purchase beneficial interests proportional to their exchange equity.

Pre-arranged senior debt: the DST sponsor negotiates senior debt with a single lender at trust formation. Loan terms, rate, tenor, recourse, prepay, are fixed before the first investor enters. Investors inherit those terms when they exchange in.

Investor debt allocation: each investor's beneficial interest comes with a pro-rata share of the DST's senior debt. The investor's tax basis includes their share of the debt (a §1031 'debt replacement' contribution). This allows investors with large debt on relinquished property to satisfy the §1031 debt-replacement rule without separately financing.

Non-recourse standard: DST senior debt is almost always non-recourse to investors (and structurally must be, the DST cannot personally guarantee). Lenders accept the non-recourse structure because the trust holds the property at a defined LTV with credit-tenant or stabilized cash flow.

Tenor and prepay: typical 5-10 year fixed-rate term, with significant prepay penalty (yield maintenance or defeasance). Investors are locked into the tenor; early refinance requires DST sponsor coordination and is rare.

Sponsor playbook for the original property owner: a 1031 exchanging sponsor evaluates DST as a passive option when they don't want active replacement-property management. The trade-off is loss of operational control and lock-in to the DST's debt stack. Not tax advice, confirm with tax counsel.