The 1031 deadlines create pressure to pick a replacement quickly. The better question comes first: how much control, liquidity, and management do you want over the next ten years? The answer usually points to one of these structures before any specific property does.
First: a DST is not an alternative to a 1031 exchange
People often search for “DST vs. 1031,” but the two are not competing choices. A 1031 exchange is the tax rule that lets you defer gain when you sell investment real estate and buy like-kind replacement property. A Delaware Statutory Trust is one kind of replacement property you can buy inside that exchange. Under IRS Revenue Ruling 2004-86, an interest in a qualifying DST is treated as a direct interest in the real estate it holds.
So the real comparison is between the things you can exchange into: another property you own outright, a fractional interest as a tenant in common, or a DST interest. A REIT belongs in the conversation too, but as a different route, because REIT shares do not qualify for a 1031.
The four options at a glance
| Direct property | DST | TIC | REIT | |
|---|---|---|---|---|
| 1031 eligible | Yes | Yes, if the trust meets Rev. Rul. 2004-86 | Yes, if properly structured | No; a 721 UPREIT exchange is a separate route |
| What you own | The deed | A beneficial interest in the trust | An undivided deeded fraction | Shares of a company |
| Management | You or your property manager | Sponsor and trustee; fully passive | Sponsor or manager, with co-owner votes | REIT management; fully passive |
| Your control | Full | None over operations or sale timing | A vote; major decisions generally unanimous | Shareholder vote only |
| Financing | You arrange and can refinance | Loan set at purchase; no new borrowing allowed | Shared loan; co-owners must agree | Set by the REIT |
| Liquidity | Sell when you choose; takes months | Very limited until the sponsor sells | Limited; may need co-owner consent | Daily if listed; restricted if non-traded |
| Diversification | One property per purchase | Can split across several DSTs | Usually one property | Broad portfolio |
| Tax reporting | Depreciation passes to you | Depreciation passes through | Depreciation passes through | Dividends; no direct depreciation |
These are general characteristics. Terms, fees, leverage, and rights vary by property and offering, so review the specific documents before you identify a replacement.
Direct ownership vs. a DST
Exchanging into another property you own outright keeps you in control. You choose the property, the tenants, the financing, and when to sell or exchange again. The trade-off is that you are still a landlord, your exchange proceeds may end up concentrated in one building and one market, and finding a replacement that fits within 45 days can be hard.
A DST trades that control for simplicity. The sponsor finds, finances, and operates the property; you receive your share of net income and depreciation. A DST can make it easier to close on time, to match the debt you need to replace, and to split proceeds across several properties. In exchange, IRS rules for DSTs prohibit the trust from refinancing, renegotiating or entering new leases except in limited cases, or raising new capital. If the property runs into trouble, the trustee’s options are narrow, and you cannot choose when it sells. Fees and sponsor quality vary widely, which is why our DST 1031 exchange guide spends as much time on due diligence as on the tax benefits.
DST vs. TIC
Before 2008, tenant-in-common interests were the most common way to buy a fraction of a larger property in a 1031 exchange. Each co-owner holds an undivided, deeded interest, and IRS guidance in Revenue Procedure 2002-22 limits a TIC to 35 co-owners and generally requires unanimous approval for a sale, a new lease, or refinancing.
That structure gives each owner a real voice, but it also gives each owner a veto. When properties struggled during the financial crisis, many TIC groups could not agree on what to do, and lenders had to deal with dozens of borrowers. DSTs largely replaced TICs in the sponsored market because the trustee makes decisions and the lender deals with one borrower. A TIC can still make sense for a small group of investors who know each other, want a say in decisions, and accept that agreement will sometimes be slow.
DST vs. REIT, and the 721 UPREIT route
REIT shares are not real property, so buying them does not complete a 1031 exchange. If you sell a property and buy REIT shares, the gain is generally taxable. REITs offer something DSTs do not: diversification across many properties and, for listed REITs, daily liquidity. For investors who are ready to stop deferring, selling, paying the tax, and investing in a diversified REIT allocation can be simpler. Our guide to private vs. public REITs covers the differences within that category.
A related path is a Section 721 exchange. Instead of a 1031, real property is contributed to a REIT’s operating partnership in exchange for partnership units, generally on a tax-deferred basis. Some DST sponsors build this in as an UPREIT program, where the DST property may later be contributed to the sponsor’s REIT. Understand two consequences before choosing that route: once you hold operating partnership units, future 1031 exchanges are generally no longer available for that money, and converting units into REIT shares or cash is a taxable event. The timing is often controlled by the sponsor.
Can you 1031 into a fund?
Generally no. Section 1031 excludes partnership interests, and most real estate funds are organized as partnerships or LLCs taxed as partnerships. Buying a fund interest with exchange proceeds would usually make the gain taxable. DSTs and properly structured TICs are the main exceptions because they are treated as direct ownership of the underlying real estate.
Which one fits your goals?
You want control
Direct property
You are willing to keep managing real estate, want to choose financing and timing, and can find a suitable replacement within the deadlines.
You want to step back
One or more DSTs
You want to keep deferring but stop managing property, and you can accept limited liquidity and no say over operations or the sale date.
You want a voice with partners
A TIC
You are investing alongside a small, trusted group, want a vote on major decisions, and accept that unanimous consent can slow things down.
You are ready to simplify
Sell and diversify, or 721
You value liquidity and diversification over continued deferral, or you are comfortable ending future 1031 flexibility through a 721 exchange.
Paying the tax is a legitimate choice too. If the replacement options are weak, a forced exchange into a poor property can cost more than the tax it defers. Our DST 1031 exchange calculator gives a rough comparison of exchanging versus selling, and our real estate client case study shows how one investor combined DSTs with other strategies.
Questions to ask before you identify a replacement
- How much debt do I need to replace to defer the full gain, and does this option provide it?
- What are all the fees: upfront load, acquisition and financing fees, asset management, and disposition fees?
- Who decides when the property is sold, and what happens to my options at that point?
- What happens if the main tenant leaves or the loan comes due in a weak market?
- Does this offering include a 721 UPREIT conversion, and would that end my ability to exchange again?
- How would this replacement fit with the rest of my real estate and investment portfolio?
Frequently asked questions
What is the difference between a DST and a 1031 exchange?
A 1031 exchange is the tax provision that lets an investor defer gain by selling investment real estate and buying like-kind replacement property. A Delaware Statutory Trust is one type of replacement property. Under IRS Revenue Ruling 2004-86, an interest in a qualifying DST can be treated as a direct interest in real estate, so it can be purchased inside a 1031 exchange. They are not alternatives to each other.
Is a DST or a TIC better for a 1031 exchange?
It depends on how much control you want. A TIC gives each co-owner a deeded fractional interest and a vote on major decisions such as sales, leases, and refinancing, but those decisions generally require unanimous agreement among up to 35 co-owners. A DST is fully passive: the trustee makes decisions, investors have no vote, and IRS rules prevent the trust from refinancing, renegotiating leases, or raising new capital. DSTs are simpler to hold and to close; TICs offer more control and more friction.
Can I do a 1031 exchange into a REIT?
Not directly. REIT shares are securities, not real property, so they do not qualify as 1031 replacement property. A related route is a Section 721 exchange, in which real property, or a DST interest held under an UPREIT program, is contributed to a REIT’s operating partnership in exchange for partnership units on a tax-deferred basis. After that step, future 1031 exchanges are generally no longer available for that investment, and converting units to REIT shares is a taxable event.
Can I do a 1031 exchange into a real estate fund?
Generally no. Interests in partnerships, LLCs taxed as partnerships, and most pooled funds are not like-kind real property for Section 1031. DSTs and properly structured TIC interests are the main exceptions because they are treated as direct ownership of the underlying real estate.
What happens when a DST property is sold?
When the sponsor sells the property, typically after several years, investors receive their share of the proceeds. At that point an investor can pay the tax on the deferred gain or start a new 1031 exchange into another property or DST. Some DSTs instead roll into a sponsor’s REIT through a 721 exchange. The timing of the sale is controlled by the sponsor, not the investor.