Risks of a DST 1031 Investment
DST 1031 interests are securities. They are not bank deposits, not insured, not guaranteed, and there is real risk of loss including the loss of your entire investment. Our advisors walk through every risk on this page with each client during the suitability review. Read this page before you subscribe to any DST.
What Could Go Wrong with a DST 1031
The benefits of a DST 1031 are real, but they don’t exist in isolation. Every benefit comes with a structural trade-off, and most of the trade-offs are baked into the IRS rules that make a DST qualify for 1031 treatment in the first place. The same prohibitions that make the structure work for tax deferral are what make it illiquid, inflexible, and sponsor-dependent.
The list below is not exhaustive. The Private Placement Memorandum (PPM) for any specific DST offering will contain the complete risk factors for that property and that sponsor. Read every PPM with our advisors before you subscribe.
Illiquidity
There is no established secondary market for DST 1031 interests. Once you subscribe, you should expect to hold the position for the full life of the DST, which can be 3 to 10 years depending on the sponsor's business plan. If you may need access to the capital before the property sells, a DST is the wrong vehicle. Some sponsors offer limited buyback or transfer programs in extreme circumstances, but these are not guaranteed and are not a substitute for liquidity.
Loss of control
The seven "prohibitions" on DST trustees (Revenue Ruling 2004-86) are the same rules that make a DST qualify for 1031 treatment, and they prevent investors from making operational decisions. You cannot vote on leases, financing, or sale timing. You cannot replace the sponsor. You cannot push for a sale earlier or hold longer. You are betting on the sponsor's judgment for the full hold period.
Sponsor risk
Performance depends heavily on the DST sponsor's track record, capital structure, and execution. A sponsor with thin reserves or aggressive underwriting can struggle in a downturn, and there is no easy way for investors to replace a struggling trustee mid-stream. Sponsor due diligence is one of the most important pieces of any DST 1031 decision. Our team evaluates sponsors continuously and only works with firms whose track records and balance sheets we can verify.
Real estate and market risk
DSTs hold real estate, and real estate values, rents, occupancy, and operating expenses fluctuate. A multifamily DST in a softening submarket, a net-lease DST whose tenant goes bankrupt, or a hospitality DST in a recession can all underperform. Past performance of other DSTs does not predict future results, and projections in the PPM are estimates based on the sponsor's assumptions, not commitments.
Distributions are not guaranteed
Monthly distributions are paid from net property cash flow. They are projections, not promises. If a property loses tenants, faces unexpected capital expenditures, or runs into operating issues, distributions can be reduced, suspended, or eliminated entirely. Several well-known DSTs have suspended distributions during their hold periods. The PPM for every offering discloses this risk explicitly.
Leverage risk
DSTs typically use non-recourse debt at the property level. Leverage amplifies both gains and losses. If property values fall and the loan can't be refinanced at maturity, equity can be impaired or wiped out. Higher-leverage DSTs (loan-to-value above 60%) carry materially more downside risk than lower-leverage offerings. Always confirm the loan-to-value, the lender, and the loan maturity for any specific DST before subscribing.
Fees and load
DST 1031 offerings carry sponsor fees, broker-dealer commissions, ongoing asset management fees, and disposition fees at sale. The all-in load reduces the net return to investors and varies meaningfully across sponsors. The PPM lays out every fee in detail, and our advisors review the full fee structure with you before you subscribe. A DST that looks attractive on its projected return may look different once you back out the load.
Tax-disqualification risk
If a DST violates one of the IRS "seven deadly sins" (for example, taking on new debt or accepting new capital after closing), it can lose its status as a like-kind replacement, retroactively disqualifying your 1031 exchange and triggering the deferred tax. This risk is rare in practice with established sponsors, but it is real, and it is one of the strongest arguments for sponsor selection mattering as much as property selection.
Concentration risk
Some DSTs hold a single property with a single tenant. If that tenant leaves or defaults, occupancy goes from 100% to 0%. Diversifying an exchange across multiple DSTs covering different properties, sponsors, and asset classes can reduce this risk, but it can never eliminate it. Even a multi-property DST is more concentrated than a publicly traded REIT or a diversified real estate fund.
Regulatory and legislative risk
Section 1031 itself has been the subject of repeated reform proposals over the past decade. Future changes in federal tax law could affect the deferral, the eligibility rules, or the DST structure specifically. There is no way to predict or hedge against legislative change, and the rules that exist today may not exist in the form you understand five or ten years from now.
When a DST 1031 Isn't the Right Fit
Some property owners weigh the risks above and decide a DST 1031 isn’t right for them. That’s a valid conclusion. A DST tends to be the wrong fit when:
- You may need access to your capital within the next 3 to 10 years.
- You want to keep actively managing real estate, not pass it off to a sponsor.
- You're not comfortable with non-recourse leverage you can't influence.
- Your exchange is small enough that a single direct property is more efficient.
- You're not comfortable holding an illiquid security.
- You'd rather pay the tax now and walk away from real estate entirely.
If most of those describe you, our advisors will tell you so on the first call. We’d rather have an honest conversation than push someone into a DST that doesn’t fit them.
How Our Team Helps You Manage These Risks
Most of the risks on this page can’t be eliminated, but they can be evaluated and weighted against your specific situation. That’s the core of what our advisors do during a suitability review.
- We screen sponsors continuously. Track record across full-cycle DSTs, capital base, regulatory history, and underwriting discipline.
- We read every PPM with you. Highlighting the leverage, fees, projected distributions, and material risk factors specific to that offering.
- We model the deferral on your numbers. So you understand exactly what you’re deferring and what happens if the exchange is later disqualified.
- We coordinate with your CPA and attorney. Tax and legal questions belong with your professionals. We make sure the answers we work from are theirs, not ours.
- We tell you when a DST isn’t right. If a sponsor, a property, or the timing doesn’t fit your situation, we say so. We don’t get paid to push you into a wrong fit.