1031 DST Frequently Asked Questions
These are the questions our advisors hear most often on consultation calls, with the answers they typically give. The answers are short on purpose. They're meant to give you a foundation to ask better follow-up questions, not to substitute for working through your specific exchange with a qualified advisor.
Is a 1031 DST right for me?
Before getting into structure, taxes, or process, it's worth answering the more basic question: does any of this apply to your situation? These four questions help you figure out whether to keep reading.
What is a 1031 DST in plain English?
A 1031 DST is a way to sell investment real estate and reinvest the proceeds into a passive real estate structure without paying capital gains tax at the time of sale. The investor exchanges their property for fractional ownership in a Delaware statutory trust that holds institutional-quality real estate. The IRS treats the trust interest as like-kind property, which is what qualifies the exchange for tax deferral.
Who qualifies to invest in a 1031 DST?
DST 1031 investments are private placement securities, which means they’re only available to accredited investors. The most common qualifying paths are a net worth over $1 million excluding primary residence, or annual income over $200,000 (or $300,000 with a spouse) for the last two years. You also need to be coming out of a qualifying 1031 exchange or have new capital to invest as part of an accredited offering.
Is a DST 1031 the same as a REIT?
No. A REIT is a publicly or privately traded company that owns real estate. Investors buy shares of the company. A DST owns the property directly, and investors hold a fractional interest in the trust that’s treated by the IRS as a direct interest in real estate. Only DST interests qualify as like-kind replacement property in a 1031 exchange. REIT shares do not.
Can I do a 1031 exchange into a DST if I'm selling my primary home?
No. A 1031 exchange only applies to investment or business-use real estate. Primary residences don’t qualify. The Section 121 home sale exclusion is a different tax rule that covers most primary home sales separately. If your situation involves a property that’s been part residence and part rental, the analysis gets more complicated and your CPA should weigh in early.
How DSTs work
The structure matters because the IRS rules that govern it shape every other answer on this page. These five questions cover what you'd actually own and how the trust operates day to day.
What do I actually own in a DST?
You own a beneficial interest in the Delaware statutory trust. The trust owns the real estate. Your beneficial interest entitles you to a proportional share of the income and any net proceeds when the property is eventually sold. For tax purposes, the IRS treats your beneficial interest as a direct interest in real estate, which is what allows it to qualify in a 1031 exchange.
Do I have any say in how the property is managed?
No. The DST sponsor handles all property-level decisions: leasing, financing, capital improvements, and the eventual sale. Once you’ve subscribed, you’re a passive investor. This is by design. The IRS imposes strict limits (the seven DST prohibitions) on what the trust can do, and one of them is that investors can’t have any management authority over the property.
What are the seven DST prohibitions?
The seven prohibitions are a set of IRS restrictions from Revenue Ruling 2004-86 that the trust must follow to qualify as 1031 replacement property. They prevent the trust from raising new capital after closing, renegotiating debt, reinvesting sale proceeds, making non-routine capital improvements, or any other action that would make the structure look like a business rather than a real estate holding. The sponsor handles compliance with these rules at the trust level.
Who is the DST sponsor and how are they paid?
The sponsor is the firm that acquires the property, creates the trust, and offers beneficial interests to investors. They earn fees at acquisition, during the hold period (asset management fees), and on the eventual sale (disposition fees). All DST sponsor fees are disclosed in the Private Placement Memorandum. Our advisors review fee structures with you before any subscription.
How long does a typical DST 1031 hold last?
Most DST 1031 offerings have a target hold period of 5 to 10 years. The sponsor times the sale based on market conditions and the business plan for the specific property. When the property sells, you receive your share of the net proceeds and have the option to 1031 exchange again into a new replacement property or take the cash and pay the deferred tax.
Money and taxes
This is where most consultation calls spend the most time. Returns, distributions, and tax treatment vary by offering and by individual situation, but the patterns here are typical.
What kind of return should I expect?
Returns vary by sponsor, asset class, and business plan. Most stabilized DST 1031 offerings target a starting cash distribution rate of 4 to 6%, paid monthly, with the possibility of additional return on the eventual property sale. Value-add offerings target lower current cash flow with higher upside at sale. All projections are estimates, not guarantees, and are disclosed in the offering documents.
How are DST distributions taxed?
Monthly DST distributions are typically treated as rental income for tax purposes. After accounting for the depreciation pass-through (which the trust allocates proportionally to investors), a meaningful portion of distributions is often sheltered from current income tax. Your CPA will receive a Form 1099 or K-1 each year showing the breakdown. Specific treatment depends on the structure of the offering and your individual tax situation.
What taxes does a 1031 exchange into a DST defer?
A qualifying 1031 exchange into a DST may defer federal capital gains tax, the 3.8% net investment income tax, depreciation recapture tax, and most state-level capital gains tax. The deferral is not an elimination. The taxes carry forward into the new investment and would generally be owed when the DST eventually sells, unless you 1031 exchange again or pass the property to your heirs.
What happens to the deferred tax when I die?
Under current law, your heirs typically receive a stepped-up basis on inherited real property, which can eliminate the deferred tax liability for the next generation. This is one of the most-cited reasons investors use 1031 exchanges as part of an estate plan. Tax law could change, and the analysis depends on your specific estate situation. Coordinate with your estate attorney.
Can I get my money out before the DST sells?
Generally no. DST 1031 interests are illiquid by design. There is no public secondary market, and the seven DST prohibitions prevent the trust from buying back interests or renegotiating the structure. Some sponsors have informal redemption programs in extraordinary circumstances, but you should plan to hold for the full sponsor-targeted hold period of 5 to 10 years.
The 1031 process and deadlines
The 45-day and 180-day clocks are unforgiving, and most exchange problems trace back to a timing decision made too late. These questions cover the process specifics every exchange has to navigate.
What are the 45-day and 180-day deadlines?
The 45-day clock starts the day your sale closes. By day 45, you must formally identify your replacement property (or properties) in writing to your qualified intermediary. The 180-day clock also starts at sale closing. By day 180, you must close on your identified replacement property. Both deadlines are strict. Missing either one disqualifies the exchange and triggers the full tax bill.
What is a qualified intermediary and why do I need one?
A qualified intermediary (QI) holds your sale proceeds during the exchange period so you never have constructive receipt of them. Constructive receipt would disqualify the entire exchange. You must engage the QI before your sale closes. We coordinate with your QI throughout the process, but we don’t act as the QI ourselves.
How early should I start the DST conversation?
As early as possible, ideally before your sale closes. Once the 45-day clock starts, your options narrow quickly. Starting before closing lets us understand your debt, your goals, and your timeline so we can identify fitting DST offerings rather than scrambling for whatever’s available at day 30. Some clients start the conversation six months before they list the relinquished property.
How fast can a DST close once I've identified it?
Most DST 1031 subscriptions can close in days, not weeks. The sponsor has already acquired the property, arranged the debt, and prepared the offering documents. Once you’ve reviewed and signed the subscription paperwork and your QI has wired the funds, the closing process is mostly administrative. This closing certainty is one of the reasons DSTs are common when a 45-day clock is running tight.
Can I split my exchange across multiple DSTs?
Yes. Many investors split their exchange across two, three, or more DSTs to diversify across sponsors, asset classes, and geographies. The IRS rules around identification (the three-property rule, the 200% rule, the 95% rule) still apply across the combined identification. Our advisors model the identification math with you before you commit.
Risk and what could go wrong
Every investment carries risk. A DST 1031 is no exception, and the passive structure means you can't course-correct once you're in. These three questions cover the failure modes worth understanding before you subscribe.
What are the main risks of a 1031 DST?
The main risks are loss of principal, illiquidity, sponsor dependency, debt risk if the property is leveraged, and the structural inability to renegotiate the deal once it closes. Real estate values can fall. Distributions can be reduced or suspended. The property may sell for less than projected. None of this is unique to DSTs (the same risks apply to direct real estate ownership), but the passive structure means you have no ability to course-correct.
What happens if the DST sponsor goes out of business?
The trust and the property are separate from the sponsor’s broader business. If the sponsor fails, the property typically continues to operate and a successor trustee or property manager is appointed. Investor distributions are paid from property income, not sponsor revenue. That said, sponsor quality matters significantly during the hold period, and is one of the items our advisors evaluate carefully on every offering.
What happens if the property doesn't perform as projected?
Distributions can be reduced or suspended, and the eventual sale price may come in below projections. Your tax deferral is preserved either way (the 1031 exchange was complete at closing), but your investment performance can fall short of what the offering documents projected. Projections are estimates, not guarantees. Sponsor track record on similar properties is one of the best signals of how an offering may perform.
Working with our firm
A few questions our advisors get specifically about our team and how we operate. If you're trying to figure out whether the consultation call is worth scheduling, this section is for you.
How are you paid?
Our advisors are compensated through the broker-dealer that places the DST subscription. The sponsor pays a placement fee to the broker-dealer at subscription, and a portion flows to our team. Investors do not pay us directly. All compensation is disclosed in the offering documents and reviewed with you before any subscription. We are not paid for consultations that don’t lead to a subscription.
What does the first conversation look like?
The first call is a 20-minute conversation. We cover your sale price, your existing debt, your timeline, your goals, your current professional team (CPA, attorney, QI), and whether a DST 1031 is even the right fit for your situation. There’s no obligation, no pressure to subscribe, and no commitment of any kind from the call. If a DST 1031 isn’t the right tool for you, we’ll say so directly.
Do I have to work with your firm to invest in a DST?
No. DST 1031 investments are available through many broker-dealers and advisory firms. What we offer is specialist focus, an independent property selection process across a curated sponsor network, and hands-on coordination with your CPA, attorney, and QI. If you’re already working with another DST advisor and the relationship is working, we don’t expect you to switch. Most of our new clients come from situations where the existing advisor wasn’t a DST specialist.