DST Pros and Cons
A Delaware Statutory Trust (DST) lets accredited investors own a passive, 1031-eligible fractional interest in larger, professionally managed real estate. Like any investment, it involves trade-offs. Below is a balanced view of the potential benefits and the risks. The risks mirror the disclosures that accompany every DST offering.
Pros
Passive, professionally managed
The sponsor and trustee handle operating decisions, so investors have no landlord or day-to-day management responsibilities. Investors also have no say in those decisions.
1031-eligible tax deferral
A DST beneficial interest is treated as a direct interest in real estate (Rev. Rul. 2004-86), so investors can defer capital gains tax through a like-kind exchange. The tax is deferred, not eliminated.
Lower minimums and diversification
Because interests are fractional, investors can spread a single exchange across multiple DSTs that vary by asset class, location, and sponsor. Diversification does not assure a profit or protect against loss.
No personal loan qualification
The trust is the single borrower on non-recourse debt, so individual investors do not personally sign for or qualify for the financing.
Closing timing
The sponsor has generally already acquired and financed the property before it is offered, which can reduce closing risk within the tight 1031 timeline.
Estate planning
Under current law, heirs may receive a stepped-up basis, and beneficial interests can simplify how fractional real estate passes to multiple heirs.
Cons
Illiquidity
DST interests are private-placement securities with no secondary market. Investors should expect to hold for the full life of the offering.
No control
Investors have no authority over operations or the timing of the eventual sale. Those decisions rest with the sponsor and trustee.
Accredited investors only
A DST interest is a security. DST interests are offered only to accredited investors, and only by private placement memorandum.
Fees and expenses
Costs associated with the offering reduce investor returns and, in some cases, may outweigh the tax benefits.
Structural restrictions
IRS rules limit what a DST trustee can do (for example, raising new capital or refinancing), which can constrain flexibility if a property faces distress.
Real estate & market risk
As with any real estate, property values, occupancy, and cash-flow distributions can fall, and investors can lose some or all of the principal invested.
DST interests are offered only by private placement memorandum to accredited investors. They are speculative and illiquid, distributions are not guaranteed, fees reduce returns, and investors can lose some or all of their investment.
DST questions, answered
What are the disadvantages of a DST?
The main disadvantages of a Delaware Statutory Trust are illiquidity (there is no secondary market), no investor control over operations or the sale timing, accredited-investor-only access, fees that reduce returns, IRS restrictions on the trustee's flexibility, and the general risk that real estate values and cash flow can decline.
Are DSTs a good investment?
Whether a DST is suitable depends on an investor's goals, tax situation, income needs, and tolerance for illiquidity and market risk. DSTs can offer passive, 1031-eligible ownership of larger, professionally managed real estate, but they are speculative, illiquid securities offered only to accredited investors. Investors should review the offering's private placement memorandum and consult their own tax and financial advisors.
Can you lose money in a DST?
Yes. Like any real estate investment, a DST can lose value. If a property loses tenants, sustains damage, or is affected by market conditions, cash-flow distributions can be reduced or suspended and investors can lose some or all of their principal.
Do you have to be accredited to invest in a DST?
Yes. DST interests are offered only to accredited investors, through a confidential private placement memorandum. Accredited status is typically based on income or net-worth thresholds defined by the SEC, or on certain professional licenses.
Learn more
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