For investors deciding where to place the proceeds from an appreciated property, the DST vs REIT question comes up early. Both structures let an investor own income producing real estate without running it day to day. And both have drawn more accredited investors looking for passive exposure.
Demand for one of them has climbed sharply. In 2025, syndicated Delaware Statutory Trust offerings raised roughly $8.41 billion in equity, according to Mountain Dell Consulting. That marked an increase of about 49% over the prior year. For anyone completing a 1031 exchange, though, the two are not interchangeable. In fact, the distinction can decide whether a sale stays tax deferred or triggers a bill. This article breaks down what each structure is, how they compare, and why the 1031 rules treat them so differently.
Key Takeaways
- ▸A DST and a REIT both give passive, fractional exposure to commercial real estate.
- ▸A DST interest counts as like kind replacement property, so it can defer capital gains.
- ▸REIT shares, by contrast, count as securities and do not qualify for a 1031 exchange on entry.
- ▸DSTs trade tax deferral for illiquidity and less control.
- ▸REITs offer liquidity but no direct 1031 path.
What Is a DST (Delaware Statutory Trust)?
A Delaware Statutory Trust is a legal entity that holds title to income producing real estate. It then sells fractional beneficial interests to investors. Under IRS Revenue Ruling 2004-86, the IRS treats those interests as like kind real property. As a result, an investor can use a DST as 1031 replacement property while staying fully passive.
In practice, a sponsor (usually a large commercial real estate firm) forms the trust. It then acquires an institutional quality property or portfolio and sells beneficial interests to individual investors. Those investors become beneficiaries of the trust. They receive a grantor trust letter and report their share of income and deductions, much like a direct owner.
DSTs are private placements under SEC Regulation D. For that reason, participation is limited to accredited investors. Minimums commonly sit around $100,000 for those completing an exchange. Some sponsors go as low as $25,000 for cash investors, though thresholds vary by offering.
To preserve the tax treatment, a DST must follow a set of restrictions often called the “seven deadly sins” (summarized here). Among them: no new capital after the offering closes, no refinancing of existing debt, no new leases (except when a tenant becomes insolvent), regular distribution of cash flow, and only minor, nonstructural improvements. These rules keep the trust passive. However, they also mean the portfolio is fixed once it closes. Because a DST is a fractional, sponsor run structure, it helps to see how it compares with other pooled models. Our guide on what to know before investing in a real estate syndication covers that.
What Is a REIT (Real Estate Investment Trust)?
A Real Estate Investment Trust is a company that owns, operates, or finances income producing real estate. It sells shares to investors. To keep its tax advantaged status, a REIT must distribute at least 90% of its taxable income to shareholders as dividends. That payout rule is why REITs are a common source of steady income.
REITs work much like mutual funds. An investor buys a share of a professionally managed portfolio and collects dividends, without owning any building directly. They also come in three broad types. Publicly traded REITs list on a stock exchange and trade like any stock. Nontraded public REITs and private REITs do not. As a result, liquidity differs a great deal. Public REIT shares sell on any trading day. Nontraded and private REITs, by contrast, carry holding periods, higher minimums, and limited redemption options.
Beyond the payout rule, a REIT must pass several tests. It needs at least 100 shareholders. No more than 50% of shares can sit with five or fewer investors (the “5/50 test”). At least 75% of assets must be real estate, and at least 75% of gross income must come from real estate sources. One practical contrast with a DST stands out here. REIT managers actively buy and sell properties within the portfolio over time. A DST, by contrast, holds a fixed set of assets from the day it closes.
DST vs REIT: A Side by Side Comparison
The core difference between a DST and a REIT is what an investor actually owns. A DST holder owns a fractional interest in specific real property. The tax code treats that as direct ownership. A REIT shareholder, on the other hand, owns stock in a company that owns real estate. That single distinction drives most of the practical differences below.
Ownership. DST: a fractional beneficial interest in real property. REIT: shares (securities) in a company.
1031 eligibility. DST: qualifies as like kind replacement property. REIT: shares do not qualify on entry.
Liquidity. DST: illiquid, with holding periods generally running 5 to 7 years (some as long as 3 to 10). REIT: public REITs trade daily, while nontraded and private REITs are far less liquid.
Minimum investment. DST: commonly $100,000 for exchange investors, sometimes $25,000 for cash. Public REIT: often under $100 per share.
Control. Both are passive. A DST portfolio is fixed at closing, while a REIT’s managers actively trade the portfolio.
Income. DST: distributions from property cash flow, historically in a 5% to 9% cash on cash range (this varies by sponsor and property, and is never guaranteed). REIT: dividends, supported by the 90% payout requirement.
Investor access. DST: accredited investors only. Public REIT: open to any investor.
Depreciation. DST: investors generally receive pro rata depreciation deductions, which can shelter part of the income. REIT: the entity handles depreciation at the company level. (For how depreciation works on directly held net lease assets, see our piece on 100% bonus depreciation for NNN investors.)
DST vs REIT for a 1031 Exchange: Why It Matters
For a 1031 exchange, a DST works and a REIT does not, at least not directly. The IRS treats a DST beneficial interest as like kind real property. So exchange proceeds can flow into a DST and keep capital gains deferred. REIT shares, however, count as securities. Section 1031 specifically excludes securities, so buying them ends the deferral.
The like kind standard for real estate is broad. Any real property held for investment generally counts as like kind to other investment real property. A DST interest meets that test under Revenue Ruling 2004-86. That is what makes it a workable replacement for a relinquished property. REIT shares fail the test, because they are personal property rather than a direct interest in real estate.
Investors who ultimately want REIT exposure do have a workaround. It runs through a DST. First, the investor completes a 1031 into a DST built for this purpose. Then, in a 721 exchange (also called an UPREIT), they contribute those interests to a REIT’s operating partnership. In return, they receive operating partnership units under Section 721, a separate nonrecognition provision. Over time, those units can convert to REIT shares.
The tradeoff is worth stating plainly. Once ownership becomes REIT shares, future 1031 eligibility ends. It is the end of the line for continued deferral. Also, not every DST offers a 721 path, so anyone who wants that option must confirm it in the offering documents. DSTs help with the tight 1031 clock too. Because they are packaged in advance, they can close inside the 45 day identification and 180 day completion windows. For the mechanics of those deadlines, our complete investor’s guide to the 1031 exchange walks through each step.
Weighing the Tradeoffs: When Each One Fits
Neither structure is better in the abstract. The right choice depends on the goal. Still, each side has a genuine case worth weighing first.
The REIT case is straightforward. A publicly traded REIT offers daily liquidity, a low entry point, and broad diversification, with no accreditation required. For an investor who wants real estate exposure inside a brokerage account and the freedom to sell anytime, a public REIT is hard to beat.
The DST case rests on tax strategy. Of the two, only a DST defers capital gains through a 1031 exchange. It also adds direct property exposure, potential pro rata depreciation, and a possible step up in basis for heirs. That last point can reduce or even erase the deferred tax under current law. For someone leaving an appreciated property but staying in real estate, that mix is the draw.
The drawbacks deserve equal weight. DSTs are illiquid, and exiting early is difficult. Investors also have no say over major decisions, such as when the sponsor sells. Fees can be meaningful. REITs carry their own tradeoffs. Public shares can be volatile, dividends are usually taxed as ordinary income, and there is no direct 1031 route in.
One policy note belongs in any 2026 discussion. The FY 2025 “Green Book” proposed capping 1031 deferral at $500,000 per taxpayer ($1 million for joint filers) each year. As of early 2026, though, no change to Section 1031 has taken effect. The rules stand today, but the legislative risk is worth watching.
A Third Path: Full Direct Ownership
Both a DST and a REIT ask the investor to give something up. A DST holder owns a slice of a property but cannot steer decisions. A REIT holder owns stock, not the real estate itself. There is a middle option, though. Some investors want a DST’s tax deferral but also full ownership and control. For them, direct single tenant NNN ownership sits between the two.
A directly owned net lease property qualifies for a 1031 exchange. It keeps the investor at 100% ownership. And with an absolute NNN lease, landlord duties stay low, because the tenant covers taxes, insurance, and maintenance. This path is more concentrated than a diversified REIT, and it requires sourcing the right deal. Even so, it preserves the control and full ownership that pooled structures cannot. Custom Capital has acquired more than $425M in commercial real estate on this model. Our take on why NNN properties make ideal 1031 replacements shows where the approach fits inside the 45 day window.
The Bottom Line: DST vs REIT
In the DST vs REIT decision, both structures deliver passive exposure to commercial real estate. But the 1031 exchange draws a clear line between them. A DST interest is like kind real property, so it can defer capital gains. REIT shares are securities, so they cannot, short of the two step 721 route that eventually closes off future exchanges. In other words, a DST trades liquidity and control for tax deferral. A REIT trades the deferral for liquidity and low cost access. The right answer comes down to one question: keep the gain deferred, or keep the capital easy to move?
Weighing a DST, a REIT, or a Direct Deal?
The cleanest next step is a quick conversation. We can talk through which structure, or a directly owned NNN deal, fits the situation, the timeline, and the tax goal.
Frequently Asked Questions
Can you 1031 exchange into a REIT?
Not directly. The IRS treats REIT shares as securities, and Section 1031 excludes securities as replacement property. So buying them would end the deferral. There is a workaround, though. An investor can first do a 1031 into a DST built for it, then use a 721 UPREIT contribution to move into a REIT’s operating partnership.
Is a DST better than a REIT?
Neither is universally better. It depends on the goal. A DST usually fits an investor completing a 1031 exchange, since it defers capital gains and offers direct property exposure. A REIT usually fits an investor who values liquidity, a low entry point, and diversification over deferral.
What is the minimum to invest in a DST?
Minimums commonly run around $100,000 for investors completing a 1031 exchange. Some sponsors accept as little as $25,000 from cash investors, though the amount varies by offering. Either way, DSTs are private placements open only to accredited investors under SEC Regulation D.
Are DST distributions guaranteed?
No. Distributions come from the underlying property’s cash flow, so they depend on tenant performance, occupancy, and market conditions. Historical figures have often landed in a 5% to 9% cash on cash range. Still, that varies by sponsor and property, and nothing is guaranteed.
What happens when a DST sells the property?
The sponsor typically sells the property after a holding period of several years. It then distributes the proceeds to investors. At that point, each investor can roll into another 1031 exchange to keep deferring gains, or recognize the gain and pay the tax due.
