Why owners consider it, and what they give up.

Income relative to equity. The question worth asking about an investment property is not what it yields on what you paid, but on what it is worth today. In markets where prices have run well ahead of rents, an owner can hold a large share of their net worth in an asset earning very little on that equity. A DST can move that equity into property types and regions where prices sit closer to rents, and the difference in cash flow is often what leads an owner to consider an exchange.

Income that stays largely tax-sheltered. Depreciation on the replacement property typically offsets much of the income it produces. The deferred gain has not gone anywhere, but the distributions arriving in the meantime are generally taxed lightly.

Tax deferral that can become permanent. Under current law, beneficiaries may receive a stepped-up basis at death, which can eliminate the deferred gain rather than merely postpone it. This depends on your estate plan and on tax law, which can change.

Diversification. Concentration is often the largest uncompensated risk a property owner carries. A single exchange can be divided among several DSTs, spreading one property’s equity across property types (multifamily, retail, industrial, self-storage, medical), regions and sponsors. Diversification widens again with a 721 conversion, since a REIT’s portfolio spans far more properties and markets than a single DST.

Genuinely passive. The trust owns the property and the sponsor manages it. There are no operating decisions, no leasing, no capital projects, and no repair bills. For owners who no longer want to run property, this is often a deciding factor.

Divisibility, after the 721 step. A property is an all-or-nothing asset. You cannot sell part of it to fund a year of retirement, and you cannot divide it cleanly among beneficiaries. REIT OP units can be sold in part, gifted in part, and divided among beneficiaries.

Partial liquidity, after conversion. Selling a building takes months, on the market’s schedule. REIT OP units can be redeemed in part, typically monthly or quarterly, so a holder can raise cash, and recognize gain, on only the portion redeemed. The programs are discretionary and can be limited in stressed markets, but they remain far more flexible than a single property.

The trade-offs

Control. You have no say in operations, leasing, financing, or the decision to sell.
Liquidity, and when it arrives. DST interests have no secondary market. Until the §721 contribution, commonly two to three years, capital is effectively locked, and the contribution is not guaranteed. Afterward, typically following a holding period of about a year, repurchase programs run monthly or quarterly and are capped in aggregate rather than per investor, so a holder can usually redeem in full. When demand runs high, requests are prorated, as at several large non-traded REITs in 2022 and 2023, and programs can be suspended.
The one-way door. Partnership interests are excluded from Section 1031 treatment. Once you hold OP units, you cannot exchange into another property. The 721 step therefore deserves a deliberate decision when choosing the DST, since in most programs the sponsor, not the investor, decides whether and when the conversion happens.
Fee layers. Sponsor, trust, and REIT-level fees can meaningfully reduce returns. They are disclosed in the offering documents but are not always easy to compare across programs. Any advisory fee is in addition to these.
Sponsor risk. You are relying on the sponsor’s underwriting, execution, and solvency. Spreading an exchange across several sponsors reduces this, and is common where the size allows.
No guarantees. Distributions are not assured, property values can fall, and a 721 conversion may not occur.

How the transaction works →