Why owners consider it, and what they give up.
General characteristics. Outcomes vary by offering and by owner.
Why owners consider it
Income relative to equity. The question worth asking about an investment property is not what it yields on what you paid, but on what it is worth today. In markets where prices have run well ahead of rents, an owner can hold a large share of their net worth in an asset returning very little current income on that equity, and the better the appreciation, the wider the gap. Commercial real estate held through a DST is priced in a different market, and the cash flow on the same equity is frequently what leads an owner to consider an exchange. Distributions vary by offering and are never guaranteed.
Income that stays largely tax sheltered. Depreciation continues to run against the replacement property, so distributions from a DST are commonly sheltered in substantial part. The deferred gain has not gone anywhere, but the income arriving in the meantime is generally taxed lightly.
Diversification, finally available. A single exchange can move one property’s equity into interests spanning several property types (multifamily, retail, industrial, self-storage, medical) across different regions and sponsors. Larger exchanges are typically spread across several offerings rather than concentrated in one. Concentration is often the largest uncompensated risk a property owner carries, and it is the one this structure addresses most directly. Diversification widens again at the 721 conversion, since a REIT’s portfolio spans far more properties, regions and property types than any single DST.
Genuinely passive. The trust owns and operates the property. There are no operating decisions, no leasing, no capital projects, and no repair bills. For owners whose original plan did not include still running property in their seventies, this is often a deciding factor.
Divisibility, after the 721 step. A property is an all-or-nothing asset. You cannot sell part of it to fund a year of retirement, and you cannot divide it cleanly among heirs. Whoever inherits it inherits the work of running it. REIT units can be sold in part, gifted in part, and split among heirs who never have to run anything.
Partial liquidity, after conversion. Selling a building happens on the market’s schedule and often takes many months. REIT units are different. Repurchase programs typically run monthly or quarterly and accept partial amounts, so a holder can raise cash without unwinding the whole position. The programs are discretionary and can be limited in stressed markets, but relative to a single property the difference is substantial.
The trade-offs
Set against all of the above:
- Control. You have no say in operations, leasing, financing, or the decision to sell.
- Liquidity, and when it arrives. DST interests have no secondary market. Until the §721 contribution, commonly two to three years, capital is effectively locked, and the contribution is not guaranteed. Afterward, repurchase programs run monthly or quarterly and are capped in aggregate rather than per investor, so in ordinary conditions a holder can usually redeem in full. When demand runs high, requests are prorated and programs can be suspended, as several large non-traded REITs did in 2022 and 2023.
- The one-way door. Partnership interests are excluded from Section 1031 treatment. Once you hold OP units, you cannot exchange into another property. The 721 step therefore deserves a deliberate decision, made when choosing the DST rather than when the conversion arrives.
- Fee layers. Sponsor, trust, and REIT-level fees are disclosed in the offering documents and are not always easy to compare across programs.
- Sponsor risk. You are taking on a manager’s underwriting, execution, and solvency. Spreading an exchange across several sponsors reduces this, and is common where the size allows.
- No guarantees. Distributions are not assured. A 721 conversion may not occur.
The estate question
For many long-term holders the deferral is not the whole goal. Under current law heirs may receive a stepped-up basis at death, which can eliminate the deferred gain rather than merely postpone it. Whether that is realistic for you depends on your estate plan, your state, and law that is subject to change.