DST vs. REIT: Which Fits a 1031 Exchange Investor?

What are you actually buying in each?

People compare DSTs and REITs as if they were two flavors of the same product. They're built differently from the ground up, and nearly every difference below follows from this table.

The short version: a DST is a small, fixed piece of specific real estate that the tax code treats as yours. A REIT is a company that owns real estate, and the tax code treats your shares as shares.

Can you use either one in a 1031 exchange?

Only the DST.

Since the 2017 tax law, Section 1031 applies only to real property held for investment or business use. Stock never qualified, and REIT shares are stock no matter what the REIT owns. A DST interest qualifies because Revenue Ruling 2004-86 treats a properly structured DST as a grantor trust: each investor is treated as owning an undivided fractional interest in the property itself. (My DST guide goes through that ruling and its restrictions in detail.)

This is the whole comparison for many of the people I talk with. If you sell a rental property and want to keep deferring the gain, a REIT isn't on the menu for the sale proceeds. You can only get to a REIT tax-deferred in a roundabout way, through a 721 exchange, which I cover below.

What the difference costs: a worked example

Say you sell a rental house you've owned for twenty years for $3,000,000. You have no loan. Selling costs are $150,000, so your net sale price is $2,850,000. Your adjusted basis is $850,000, and $400,000 of the depreciation you took over the years is still in there. All figures are hypothetical.

Your gain: $2,850,000 − $850,000 = $2,000,000.

If you sell outright and pay the tax, here is the federal bill at 2026 rates for a high-income seller (the 20% capital gains rate applies above $613,700 of taxable income for married couples filing jointly and $545,500 for single filers):

• $400,000 of unrecaptured §1250 gain at up to 25%: $100,000
• $1,600,000 of remaining long-term gain at 20%: $320,000
• 3.8% net investment income tax on $2,000,000: $76,000
• Federal total: $496,000, before any state tax. In California, add up to 13.3%, or as much as $266,000 more.

Using federal tax only:

• Buy a REIT after paying tax: $2,850,000 − $496,000 = $2,354,000 to invest.
• Exchange into a DST: the full $2,850,000 goes into the exchange.

That's $496,000 more capital invested through the exchange. But the comparison isn't finished until you count costs. If a DST's up-front load and offering costs took a hypothetical 10% of your equity, $2,565,000 of your $2,850,000 would reach real estate. If you bought a listed REIT with negligible trading costs, $2,354,000 would. If you bought a non-traded REIT share class with a hypothetical 3% up-front commission, about $2,283,000 would. These are made-up round numbers to show the math, not the terms of any offering.

So in this example, the exchange still puts about $211,000 more to work than the listed REIT, even after a heavy load. With a smaller gain the answer changes. If your gain were $200,000, the federal tax would be closer to $50,000, and a 10% load on a $2.85 million DST investment ($285,000) would cost far more than the tax you deferred. I run this math with every client, because the right answer depends on the size of the gain relative to the money being invested, and people tend to assume deferral always wins.

Two more things to keep in mind. Deferred tax is still owed eventually, unless you hold until death and your heirs receive a stepped-up basis under current law. And the money in a REIT is liquid; the money in a DST isn't. I'll come back to both.

Talk to your CPA or tax attorney and your qualified intermediary before deciding; this is not tax or legal advice.

How is a listed REIT different from a non-traded REIT?

They own similar buildings and have very different investor experiences.

Listed REITs trade on a stock exchange. You can buy or sell any trading day at the market price, and that price moves with interest rates, investor sentiment and the stock market, sometimes far more than the value of the buildings underneath. Listed REIT prices fell sharply in 2020 and again in 2022 while many of their properties kept collecting rent. If you can stomach that volatility, the liquidity is real and the costs of getting in and out are low.

Non-traded REITs are registered with the SEC and sold through broker-dealers, but not listed. Most of the larger ones today are "NAV REITs": they calculate a net asset value per share, usually monthly, based on appraisals, and sell and repurchase shares at that value. Their prices move much less than listed REITs, because appraisals move slowly. That smoothness is partly real and partly an accounting effect. When the market for buildings falls, appraised values tend to lag.

Liquidity in a NAV REIT comes from a share repurchase plan. The common design caps total repurchases at 2% of NAV per month and 5% per quarter, lets the board limit or suspend the plan, and charges an early-repurchase discount (often 5%) on shares redeemed within the first year. In 2022 and 2023, several large non-traded REITs received more redemption requests than those caps allowed and filled them pro rata, meaning investors who asked for all their money back got only part of it each month. The caps worked as written. Investors who assumed "monthly liquidity" meant "I can get out when I want" learned the difference.

There's also an older generation of non-traded REITs with fixed offering prices, high up-front commissions and very limited redemptions, which planned to list or sell after several years. Some of those exits came at values well below the original price. If you hold one from that era, read its latest annual report; the exit options are spelled out there.

How liquid is each?

From most liquid to least:

1. Listed REIT: Sell any trading day at the market price. The risk is that the market price is low when you need to sell.
2. Non-traded NAV REIT: Request a repurchase at NAV, usually monthly, subject to the 2%/5% style caps, early-repurchase discounts and the board's discretion to limit or suspend.
3. DST: No redemption. No exchange listing. A small secondary market exists, but buyers usually pay a discount and the sponsor typically has to consent to the transfer. In practice, you get your money when the sponsor sells the property, which might be five years from now or twelve.

I tell DST clients to invest only money they can leave alone for ten years or more. That's not a scare line; it's the honest planning horizon for an illiquid asset whose exit date someone else controls.

Who controls what?

In both cases, not you. The degree differs.

In a REIT, shareholders elect the board of directors, which oversees management, and they vote on certain major transactions. In practice, an individual shareholder's influence is negligible, but the board can change strategy, sell properties, refinance, raise capital and buy new assets. The REIT is a going concern that adapts.

In a DST, investors usually vote on nothing that matters day to day, and the trust itself is deliberately frozen. Under Rev. Rul. 2004-86, the trustee can't refinance, take in new capital, sign new leases (with narrow exceptions), make major improvements or reinvest sale proceeds. Sponsors work around this with master leases and "springing LLC" conversion provisions, which I explain in the DST guide. The upside of a frozen structure is predictability: the loan, the leases and the business plan you read in the PPM are the ones you'll live with. The downside is the same sentence.

What do they cost?

All three carry costs. They show up in different places.

DSTs carry most of their cost up front: selling commissions, dealer-manager fees, offering and organization costs, a sponsor acquisition fee, financing fees and reserves, all disclosed in the PPM's "Estimated Use of Proceeds" table. Ongoing costs include asset management and property management fees, any spread the master tenant keeps, and often a disposition fee or profit share at sale. The sponsor may also buy the property and sell it to the trust at a markup, which the PPM discloses. In total, the load can take a double-digit percentage of your equity before a dollar of it is real estate. That's why the gain-size math above matters.

Non-traded REITs today usually offer several share classes. Classes sold through brokers typically carry an up-front commission of a few percent plus an annual servicing fee; classes sold through fee-based advisory accounts may have neither, but then you're paying an advisory fee. On top of that, the REIT pays its external advisor a management fee based on NAV and often a performance fee. Those costs come out of returns rather than your initial investment, but they're real and continuing.

Listed REITs have the lowest entry and exit costs: a trading commission, which is often zero now, and the bid-ask spread. Internal costs (management, general and administrative expenses) vary widely. Some are internally managed, some externally. You won't see these costs on a fee table; they're inside the financial statements.

My view: a DST's fees are justified only if the deferral, the specific property and the sponsor's work are worth more to you than what you'd keep by paying the tax and buying something cheaper and liquid. For a large gain, that's often true. For a small gain, often not.

How is each taxed?

This is where the structures diverge most, and where I find people's assumptions are most often wrong.

DST: grantor trust reporting on your Schedule E

A DST under Rev. Rul. 2004-86 is a grantor trust. It doesn't file a partnership return or send a K-1. Each year the sponsor sends you a statement showing your share of rents, operating expenses, mortgage interest and depreciation, and you report it on Schedule E as if you owned that slice of the property directly.

What that means in practice:

• Depreciation is yours. Your basis carries over from the property you exchanged, and generally keeps depreciating on the old schedule; any added basis (from extra debt or cash) starts a new schedule. If your old property was heavily depreciated, the carried-over piece may have little left to deduct, so don't assume a DST will shelter as much income as your old building did in its early years.
• Taxable income often runs below cash distributions while depreciation is available. The gap reduces your basis and comes back as gain when the property is sold, unless you exchange again.
• Income is generally passive, subject to the passive activity rules.
• You may file in other states. DST investors can owe nonresident returns where the trust's properties sit. A portfolio DST spread across several income-tax states can mean several state returns each year.
• Section 199A for rental income is uncertain. Rental income can count as qualified business income only if the rental rises to a trade or business. The IRS's rental real estate enterprise rules in Revenue Procedure 2019-38 specifically exclude property leased under a triple-net lease, which describes many DSTs. Ask your CPA rather than assuming it applies.
• The 3.8% net investment income tax generally applies to rental income for high earners.

REIT: Form 1099-DIV

A REIT avoids most corporate tax by distributing at least 90% of its taxable income and deducting what it pays out. You receive a Form 1099-DIV that splits your distributions into categories, each taxed differently:

• Ordinary dividends (box 1a). Most REIT dividends aren't "qualified dividends," so they're taxed at ordinary income rates, up to 37%.
• Section 199A dividends (box 5). The portion of ordinary REIT dividends eligible for the 20% qualified business income deduction. The One Big Beautiful Bill Act, signed in July 2025, made this deduction permanent at 20%. At the top bracket, that brings the effective federal rate on those dividends from 37% to 29.6%. You have to hold the shares more than 45 days during the 91-day period around the ex-dividend date for the deduction to apply. The deduction doesn't reduce the 3.8% net investment income tax, so the top combined federal rate on these dividends is 33.4%.
• Capital gain distributions (box 2a). Gains from property sales the REIT passes through, taxed at long-term capital gains rates, with part possibly taxed at up to 25% as unrecaptured §1250 gain.
• Nondividend distributions (box 3), or return of capital. Not taxed when received; they reduce your basis in the shares. They reflect, among other things, the REIT's depreciation. You pay tax on them later, as capital gain, when you sell.

REIT dividends are generally taxed only by your home state, no matter where the REIT's properties are. That's one less headache than a multi-state DST.

A side-by-side illustration

To make the reporting difference concrete, here are two hypothetical $10,000 distributions for an investor in the top federal bracket. The splits are made up for illustration and do not represent any offering.

DST: $10,000 of cash distributed. Suppose your share of rents minus expenses and interest is $9,000, and your depreciation deduction is $5,000, so taxable rental income is $4,000.

• $4,000 × 37% = $1,480
• $4,000 × 3.8% NIIT = $152
• Federal tax: $1,632. Basis is reduced by the $5,000 of depreciation.

REIT: $10,000 of dividends, split $6,000 Section 199A dividends, $1,000 capital gain distributions and $3,000 return of capital.

• $6,000 × 80% × 37% = $1,776
• $6,000 × 3.8% NIIT = $228
• $1,000 × (20% + 3.8%) = $238
• $3,000 return of capital: no current tax; basis reduced by $3,000
• Federal tax: $2,242.

Neither is "better." Change the depreciation or the split and the answer flips. The point is that both structures let part of the cash flow come to you sheltered for now, through depreciation in the DST and return of capital in the REIT, and both hand that deferred amount back as gain when you sell. Your CPA can run the real numbers once you have actual statements.

At death

Under current law, both DST interests and REIT shares generally receive a basis step-up to fair market value at the owner's death, which can eliminate the deferred gain for heirs. The federal estate tax exemption is $15 million per person in 2026, permanent and indexed to inflation under the 2025 law, though Congress can always change it. For many families, the step-up matters more than the estate tax.

How does a 721 exchange connect DSTs and REITs?

A 721 exchange is how a 1031 investor can end up in a REIT without paying the tax first. It uses Section 721, which generally allows you to contribute property to a partnership in exchange for a partnership interest without recognizing gain.

Most REITs that use this are "UPREITs": the REIT owns its properties through an operating partnership (OP), and the OP can issue OP units to people who contribute property. OP units are typically designed to track REIT shares in value and distributions, and they can usually be redeemed later for cash or REIT shares.

There are two routes:

1. Direct contribution. You contribute your own property to the OP for units. This only works if the REIT wants your particular property, which usually means a large, institutional-quality asset in its target market. Most individual rental owners don't have that.
2. The DST two-step. You 1031 exchange into a DST sponsored by an affiliate of a REIT (often called a 721 DST). After a holding period, the REIT's OP may acquire the DST's property in exchange for OP units, which are distributed to the DST investors. How long that hold should be is a judgment call for your tax advisor; there's no statutory number, and holding the DST interest for investment matters for the original 1031.

Some details people miss:

• The option usually belongs to the REIT, not to you. Many 721 DSTs give the operating partnership the right, not the obligation, to acquire the property, typically at an appraised fair market value. If the REIT doesn't exercise it, the property may be sold for cash, and you can 1031 again or pay the tax.
• It's a one-way door. OP units are partnership interests. They can't be exchanged under Section 1031. Once you're in, you can't exchange back into real estate.
• Converting is taxable. Redeeming OP units for cash or REIT shares is a taxable event, and it brings all the gain you've deferred through every prior exchange into income for the units you convert. Many investors convert in pieces over several years to spread the tax. Some hold the units until death for the step-up under current law.
• You get a K-1 again. The OP is a partnership. You'll receive a K-1 for your units, and you may be allocated income connected to the built-in gain of the property you contributed.
• Concentration and volatility. Your money is now tied to one REIT's portfolio, management and, if listed, its share price. If you redeem units for shares to sell, you're selling at the market price that day.
• Liquidity is better than a DST but not unlimited. Redemption rights, notice periods and any lockups are in the partnership agreement and the offering documents.

My take: a 721 makes sense for someone who has done the active-real-estate chapter of life, wants to stop exchanging, wants a diversified portfolio and some eventual liquidity, and is comfortable that the next tax event is one they'll choose (or leave to the step-up). It's a poor fit for someone who expects to want direct property again, or who might need a large lump of cash in a few years, because the conversion would trigger the entire deferred gain at once. My 721 exchange guide and OP units guide go deeper on both.

Which fits which investor?

These are my general views, not a recommendation for your situation.

A DST tends to fit you if you're selling investment property with a large deferred gain, you want to keep deferring and keep the option to exchange again, you're done managing tenants, you can leave the money alone for a decade, and you're accredited.

A listed REIT tends to fit you if your gain is small or you've already paid the tax, you value daily liquidity, you want broad diversification at low cost, and you can tolerate stock-market-style price swings.

A non-traded REIT tends to fit you if you want real estate exposure without daily price swings, can accept limits on redemptions and ongoing fees, and don't need the money quickly. You should go in knowing that monthly liquidity can be capped or suspended.

A 721 path tends to fit you if you want to end your exchange chain in a diversified, more liquid structure, while keeping the deferral until a time you pick.

Some people combine them. I've seen it make sense to put most of a large exchange into a couple of DSTs for deferral and keep a separate, taxable portion (cash boot you chose to take, or money from outside the exchange) in listed REITs for liquidity. Splitting like that is a judgment about your cash needs, not a formula.

What I'd steer you away from is choosing between them on the distribution rate alone. A DST and a REIT paying the same cash yield can leave you with very different after-tax income, different liquidity and different exit options, and a REIT's quoted distribution can include return of capital. Read the tax reporting and the exit terms before you compare yields.

Risks and limitations

Both DSTs and REITs are investments in real estate securities, and both can lose money. Read the PPM or prospectus, including the risk factors, before investing.

DSTs - Illiquidity. No public market or redemption right; you generally must hold until the sponsor sells, which can take longer than projected. - Loss of principal. The property can lose value; with debt, you can lose some or all of your investment. - Distributions are not guaranteed. They can be reduced or suspended, including by lender cash-management provisions. - Sponsor reliance and limited control. Sponsor affiliates typically act as trustee, manager and master tenant; investors have little or no vote. - Fees and load. Up-front and ongoing fees reduce the amount invested in real estate. - Leverage. Debt is fixed and can't be refinanced without converting to an LLC, which can end future 1031 eligibility. - Concentration. Most DSTs hold one or a few properties. - Tax risk. A failed exchange or a structure that doesn't comply with Rev. Rul. 2004-86 can make deferred gain taxable. Tax law, including Section 1031 and the step-up in basis, can change.

Non-traded REITs - Limited liquidity. Repurchases are capped, can be prorated, and can be limited or suspended by the board. - Fees. Up-front commissions on some share classes, ongoing servicing fees and advisor fees reduce returns. - Valuation risk. NAV is based on appraisals that can lag market values. - Distributions are not guaranteed and may include return of capital or be funded from sources other than cash flow. - No 1031 eligibility. Purchasing with sale proceeds requires paying tax first.

Listed REITs - Price volatility. Share prices can fall sharply and move with the stock market and interest rates. - Distributions are not guaranteed and can be cut. - No 1031 eligibility.

721 exchanges and OP units - Loss of 1031 eligibility. OP units can't be exchanged under Section 1031. - Taxable event on conversion or sale. Redeeming OP units for cash or REIT shares triggers the deferred gain. - Concentration. Your investment depends on a single REIT. - REIT share price volatility. The value of OP units generally tracks the REIT's share price or NAV. - No assurance the REIT will acquire the DST property. The option is usually the REIT's.

Frequently asked questions

Can I 1031 exchange into a REIT?

Not directly. REIT shares are stock, and Section 1031 only covers real property. If you sell a rental and buy REIT shares, you pay tax on the gain first. The indirect route is a 721 exchange: you exchange into a DST whose property a REIT's operating partnership may later acquire for OP units, or, if a REIT wants your property, you contribute it directly for units. Either way, you end up with OP units, not shares, and further 1031 exchanges are off the table.

Do DSTs pay more than REITs?

There's no honest general answer, and I won't quote typical rates. Distributions depend on the specific property, its debt, its fees and the price paid. More important, cash distributions aren't the same as after-tax income or total return: a REIT's distribution may include return of capital, and a DST's may be sheltered by depreciation you'll recapture later. Distributions from both are not guaranteed and can be reduced or suspended.

Is a DST less risky than a REIT?

Neither one protects your principal, and neither is low risk. They have different risks. A DST is usually concentrated in one or a few properties, can't refinance and is illiquid, but it doesn't swing with the stock market day to day. A listed REIT is diversified and liquid but its price can fall sharply. A non-traded REIT smooths prices through appraisals but can limit redemptions. Which risks you can live with is the real question.

What is the Section 199A deduction for REIT dividends?

It's a deduction equal to 20% of qualified REIT dividends, the ordinary dividend portion reported in box 5 of your Form 1099-DIV. The 2025 tax law made it permanent. For someone in the 37% bracket, it lowers the effective federal rate on those dividends to 29.6%, plus the 3.8% net investment income tax where it applies. You need to hold the shares more than 45 days around the ex-dividend date to claim it.

How is DST tax reporting different from a REIT's 1099?

A DST sends you a grantor trust statement of your share of rents, expenses, interest and depreciation, which you report on Schedule E as though you owned the property directly, possibly with nonresident state returns where the property sits. A REIT sends a Form 1099-DIV splitting distributions into ordinary dividends, 199A dividends, capital gains and return of capital, generally taxed only by your home state. DST reporting usually takes more of your CPA's time.

Can I sell my DST interest and buy a REIT later?

You can, but selling a DST interest early is hard: there's no public market, transfers usually need sponsor consent and secondary buyers typically pay a discount. And selling outside an exchange triggers the deferred gain. The more common path is waiting for the property to sell, then either paying the tax and buying REIT shares, or, in a 721 DST, receiving OP units if the REIT acquires the property.

What happens to my deferred gain when I convert OP units to REIT shares?

Converting OP units into REIT shares (or cash) is a taxable event for the units you convert. It brings the gain you've deferred, including gain carried through earlier 1031 exchanges, into income at that point. Many investors convert gradually to spread the tax over several years. Holding units until death may let heirs receive a stepped-up basis under current law, which can change.

Do I need to be accredited to buy a REIT?

Not for a listed REIT; anyone with a brokerage account can buy shares. Non-traded REITs sold publicly through a prospectus apply suitability standards set by state regulators and the sponsor, which are typically lower than the SEC's accredited investor thresholds. DSTs are private placements and require accredited status: generally more than $1 million in net worth excluding your home, or income above $200,000 ($300,000 jointly) in each of the past two years.

If you're deciding between keeping your exchange going and cashing out into something more liquid, send me your numbers and I'll walk through the tax, the fees and the trade-offs with you.

Sources

• Internal Revenue Service, Revenue Ruling 2004-86, Internal Revenue Bulletin 2004-33
• 26 U.S.C. §1031, Exchange of real property held for productive use or investment
• 26 U.S.C. §721, Nonrecognition of gain or loss on contribution to a partnership
• 26 U.S.C. §199A, Qualified business income
• 26 CFR §1.199A-3, Qualified business income, qualified REIT dividends and qualified PTP income
• Internal Revenue Service, Instructions for Form 1099-DIV
• Internal Revenue Service, Revenue Procedure 2019-38
• U.S. Securities and Exchange Commission, Accredited Investors
• Paul Hastings, REIT All About It: One Big Beautiful Bill Tax Updates for REITs
• Willkie Farr & Gallagher, Proposed Regulations Allow Section 199A Pass-Through for RIC Shareholders (holding-period rule)
• Kiplinger, IRS Updates Capital Gains Tax Thresholds for 2026
• Morgan Lewis, IRS Announces Increased Gift and Estate Tax Exemption Amounts for 2026