The landlord's exit

After 20 years owning an apartment building, you sell and receive sale proceeds. A qualified intermediary holds the cash while you search for replacement property to defer capital gains taxes.

What a DST actually is

A Delaware statutory trust is not a fund, REIT, or partnership. You buy a fractional beneficial interest in a trust that owns real estate. The IRS treats it as direct real estate ownership for tax purposes, qualifying it as 1031 exchange replacement property.

“A DST is not a fund, not a real estate investment trust (REIT) and not a partnership.”

How your investment works

Invest $1 million in a $100 million property and you own 1% of the trust. If the property carries a $50 million mortgage, your $1 million buys 2% of the equity plus roughly $1 million in allocated debt for tax purposes.

The debt you don't sign for

The allocated mortgage is nonrecourse, meaning the lender's claim runs only against the property if it fails, not against your personal assets. But interest expense still reduces cash flow and loan terms shape when the sponsor can sell.

“The debt is nonrecourse to you, so if the property fails, the lender's claim generally runs only against the property itself.”

The 45-day identification window

Your exchange funds move from the qualified intermediary straight into the DST. You must identify the DST as replacement property within 45 days and close within 180 days, or by your tax filing deadline if that comes first.

“Replacement property generally must be identified within 45 days and closed within 180 days.”

How income reaches you

The property collects rent, pays operating expenses and debt service, then distributes what remains to you, usually monthly. A 5% annual distribution on $1 million yields $50,000 yearly, but that's a target rate, not a guarantee.

“That 5% is a target rate, not a guarantee, and not the same thing as total return.”

Freedom from the phone calls

No more 2 a.m. emergency calls, tenant disputes, or maintenance headaches. A professional sponsor and asset manager run the building. You also gain access to large properties you couldn't purchase alone and diversification across property types and regions.

“No more toilets. No more 2 a.m. phone calls.”

The control you surrender

The sponsor decides tenant leases, financing, reserves and sale timing. You get no vote. This lack of control extends to the sponsor too. If the roof needs replacement or the loan comes due at a bad time, there's less room to maneuver than owning directly.

“You don't get a vote. That is not a footnote. That's the deal.”

The liquidity problem

A DST interest is illiquid. There's no public market to sell it quickly. A secondary sale, if you find one, typically comes at a steep discount. Most investors get their money back only when the sponsor sells the property on the sponsor's timeline.

“A DST interest is illiquid. There's no market on which you list it on a Tuesday and sell it by Friday.”

Tax deferral, not erasure

When the sponsor eventually sells, your deferred gain becomes taxable unless you 1031 exchange the proceeds into another qualifying property. Taking cash out or replacing less property value or debt can trigger immediate taxation on part of your gain.

“The tax is deferred, not erased.”

The tax reporting complexity

You receive tax reporting for your share of the property's income, expenses and depreciation. What lands in your account and what you report to the IRS won't always match, requiring careful tracking and professional guidance.

Before you judge the pitch

Understanding the mechanics of a DST comes before evaluating any specific offering. Know what you're buying, how leverage works, what control you're surrendering and when you can exit before comparing yields, sponsors or properties.

“You shouldn't judge the sales pitch until you understand the mechanics.”

Getting professional guidance

A fee-only DST adviser can help you compare structure, leverage and exit terms across available options without commission incentives clouding the analysis. This guidance is especially valuable when planning complex real estate transitions.

“A fee-only DST adviser can help you evaluate available options without commission incentives.”