DSTs and REITs both offer passive exposure to real estate—but that's where the similarities end. They have fundamentally different tax treatment, ownership structures, and use cases. If you're selling rental property, understanding these differences could save (or cost) you tens of thousands in taxes.
The Fundamental Difference
DST (Delaware Statutory Trust)
You own a fractional interest in actual real estate. The IRS treats this as direct property ownership, just structured through a trust. You get a K-1, depreciation deductions, and— critically—1031 exchange eligibility.
Think of it as: Co-owning a building with 200 other people, managed by a sponsor.
REIT (Real Estate Investment Trust)
You own shares in a company that happens to own real estate. It's a stock. You get dividends (mostly ordinary income) and capital gains/losses when you sell shares. No 1031 eligibility.
Think of it as: Owning stock in a real estate company, like owning Apple stock.
The 1031 Question: Often the Only Question That Matters
If you're selling appreciated rental property, this one fact usually decides everything:
DST → 1031 Exchange = Tax Deferred
Sell your $500k rental, exchange into DST, pay $0 in capital gains tax today
REIT → No 1031 = Tax Due Now
Sell your $500k rental, buy REITs, pay ~$80-100k in capital gains tax immediately
REITs are securities (stocks), not real estate. The IRS does not allow 1031 exchanges into securities—period. If you're sitting on a large capital gain and want to defer it, REITs are not an option.
Complete Feature Comparison
| Feature | DST | Public REIT | Non-Traded REIT |
|---|---|---|---|
| 1031 eligible | Yes | No | No |
| Depreciation pass-through | Yes (K-1) | No | No |
| Distribution tax treatment | Partially sheltered by depreciation | Ordinary income (mostly) | Ordinary income (mostly) |
| Typical yield | 4-6% | 3-5% | 5-7% |
| Liquidity | None (5-10 year hold) | Same-day (market hours) | Limited (quarterly redemption if available) |
| Minimum investment | $100,000 typical | ~$20 (one share) | $1,000-$5,000 |
| Accredited investor required | Usually yes | No | Sometimes |
| Pricing transparency | Appraisal-based | Real-time market price | NAV-based (updated periodically) |
| Upfront fees | 8-15% | $0-$10 commission | 3-12% |
| Portfolio | Specific property/properties | Diversified, changes over time | Diversified, changes over time |
| Market volatility | Not market-traded | Daily price swings | Smoother (less frequent pricing) |
Tax Treatment: A Worked Example
Let's see how $500,000 invested in each vehicle might be taxed differently over a 5-year period for someone in the 24% federal tax bracket.
DST: Tax-Advantaged Income
Effective tax rate: 6.7% on distributions
REIT: Ordinary Income
Effective tax rate: 19.2% on distributions
5-year difference: The DST investor keeps ~$15,600 more in after-tax income over 5 years ($116,600 vs $101,000). And that's before considering the 1031 tax deferral on entry.
Important caveat: DST depreciation is "recaptured" at sale (taxed at 25%). But if you 1031 exchange into another DST, you defer even that. With REITs, you pay taxes every year with no deferral option.
Understanding the Three Types of REITs
Not all REITs are the same. Here's what you need to know:
1. Publicly-Traded REITs
Traded on stock exchanges (NYSE, NASDAQ). Examples: Prologis, Equity Residential, Public Storage.
- + Highly liquid, transparent pricing, low fees
- - Volatile (trades like stocks), no 1031 eligibility
2. Non-Traded REITs (Public, Not Listed)
SEC-registered but not on exchanges. Sold through brokers/advisors.
- + Less volatile, higher yields, more stable pricing
- - High fees (often 8-15%), limited liquidity, still no 1031 eligibility
3. Private REITs
Not SEC-registered. Available only to accredited investors.
- + Potentially higher returns, less regulatory overhead
- - Less disclosure, higher risk, still no 1031 eligibility
Key point: No type of REIT qualifies for 1031 exchange—not public, not non-traded, not private. They are all securities, not real property.
When Each Makes Sense
Choose a DST if:
You're doing a 1031 exchange — This is the most common reason. DSTs are one of the few passive investments that qualify.
You want depreciation benefits — DST depreciation can shelter 60-80% of distributions from immediate taxation.
You can commit capital for 5-10 years — DST illiquidity is a feature if you don't need access to the money.
You want to know exactly what you own — DSTs hold specific properties; you can visit them, research the markets, evaluate the tenants.
Choose a REIT if:
You're investing cash (not 1031 proceeds) — If you're not deferring a gain, REITs offer more flexibility.
You might need access to your money — Public REITs can be sold any trading day. Try that with a DST.
You want to start small — $1,000 into a REIT index fund gives you exposure to hundreds of properties. DSTs require $100k+.
You're using a retirement account — REITs work great in IRAs/401(k)s where taxes are already deferred.
Common Misconceptions
"Non-traded REITs are similar to DSTs"
No. Non-traded REITs are still securities—they don't qualify for 1031 exchanges and don't pass through depreciation. The main similarity is illiquidity, which isn't a good reason to choose an investment.
"REITs have higher returns than DSTs"
Historically, public REITs have averaged 8-10% total returns (including appreciation). But after accounting for DST tax advantages and 1031 deferral, the comparison is more nuanced. And past REIT returns don't guarantee future results.
"DST fees are too high compared to REITs"
DST fees (8-15%) are higher than buying a REIT ETF (nearly 0%). But if you're comparing DSTs to the alternative of paying $100k in capital gains taxes, the fees look different. You're paying for tax deferral, not just real estate exposure.
Quick Decision Framework
Are you selling rental property with a significant gain?
→ Yes: DST (for 1031 eligibility) | No: Continue below
Do you need access to this money within 5 years?
→ Yes: Public REIT | No: Either could work
Is this money in a tax-advantaged account (IRA/401k)?
→ Yes: REIT (DST tax benefits are redundant) | No: Consider DST for tax efficiency
Do you have $100,000+ to invest?
→ No: REITs (DSTs have high minimums) | Yes: Either could work
Key Takeaways
- 1.DSTs qualify for 1031 exchanges; REITs do not. For investors selling appreciated property, this often ends the debate.
- 2.DSTs offer depreciation pass-through that can shelter 60-80% of income from immediate taxation. REIT dividends are mostly ordinary income.
- 3.REITs offer liquidity and accessibility that DSTs cannot match. You can buy $100 of REITs and sell tomorrow.
- 4.They serve different purposes. DSTs are for tax-deferred 1031 exchanges with long time horizons. REITs are for liquid real estate exposure.
- 5.You can use both — DSTs for 1031 proceeds, REITs for retirement accounts and liquid reserves.
This content is for educational purposes only and does not constitute investment, tax, or legal advice. DSTs are securities that require accredited investor status. All investments carry risk of loss. Consult qualified professionals before making investment decisions.