What's the average annual return on a DST?

Returns vary significantly by property type, leverage, market conditions, and sponsor quality. Many DST offerings project annual cash-on-cash yields of 4-6%, plus potential appreciation at disposition. However, projections are not guarantees, and actual returns can be higher or lower. Net of fees, some investors have experienced total returns (income plus appreciation) of 6-10% annually, while others have experienced losses. Past performance data is sponsor-specific and should be requested directly.

Can I do another 1031 exchange when my DST sells?

Yes. When the DST's property is sold at the end of the hold period, your share of the proceeds is eligible for a new 1031 exchange. Many DST investors exchange into new DSTs at disposition, continuing the tax deferral indefinitely. Your DST sponsor or advisor can facilitate this transition.

What if the DST property is sold at a loss?

If the property is sold for less than its adjusted basis, investors may recognize a loss. The loss treatment depends on your individual tax situation and other factors. Consult your CPA. The more common risk isn't an outright loss but a below-expectations return that, combined with the fee drag, produces a disappointing total outcome.

Can I invest in a DST outside of a 1031 exchange?

Yes. DSTs are available as direct cash investments as well as 1031 exchange investments. Non-1031 investors don't receive the tax deferral benefits, but they receive the same income distributions, tax benefits (depreciation), and proceeds at disposition.

How do I get out of a DST early?

Generally, you don't. DST interests are illiquid by design. Some sponsors offer limited redemption programs, and there are a few secondary-market platforms that facilitate resales, but pricing is typically at a significant discount to appraised value. Plan on committing your capital for the full hold period.

DST Pros and Cons: A Balanced Assessment for 1031 Investors

12 min read · Delaware Statutory Trusts · Last updated March 2026

Key Takeaways

DSTs offer no management, fast closing, and diversification — but at the cost of 10-18% in fees, 5-10 year illiquidity, and zero control. The tradeoff makes sense when convenience outweighs cost.

Benefits

Benefit	What it means in practice
No property management	The sponsor handles leasing, maintenance, capital expenditures, accounting, and disposition. You receive statements, not maintenance calls.
Speed of closing	DSTs can close in 3-5 business days. When the 45-day identification deadline is approaching or a direct-property deal collapses, this speed can rescue the exchange.
Diversification	Split exchange equity across multiple offerings: different property types, geographies, sponsors, and tenant bases. A single direct-property exchange typically concentrates in one asset.
Institutional-quality assets	DSTs hold properties most individual investors cannot buy alone: $50M apartment complexes, $100M distribution centers, hospital-anchored medical portfolios.
Monthly income	Most DSTs distribute monthly based on the property's net operating income. Predictable cash flow without the variability of collecting rent yourself.
Identical tax treatment	A properly structured DST exchange defers the same taxes as a direct-property exchange: federal capital gains, depreciation recapture, NIIT, and state tax. No deferral penalty for choosing DSTs over direct property.

Risks

Risk	What it means in practice
No control	You cannot choose tenants, set rents, approve capital expenditures, decide when to sell, or influence any operational decision. The trustee and sponsor make every call.
10-18% fee load	On a $200,000 investment with 15% total fees, $30,000 goes to commissions, sponsor compensation, and organizational costs before your money reaches the property. Over a 7-year hold, fee drag reduces effective annual returns by roughly 1.5-2.5%.
Illiquidity for 5-10 years	No active secondary market. If circumstances change, your options for accessing capital are limited. Secondary-market sales, where available, typically come at a 20-40% discount.
Structural inflexibility	IRS rules that make DSTs 1031-eligible also prevent new borrowing, major improvements, and lease renegotiation beyond pre-set parameters. If the market shifts and the property needs repositioning, the DST may not be able to respond.
Sponsor dependency	Your outcome depends entirely on the sponsor's competence, integrity, and financial stability. A sponsor who overleverages, mismanages, or faces financial trouble can impair your investment, and you have no ability to intervene.
Potentially lower net returns	Because of fees and passive constraints, DST net returns often trail what a skilled, active investor could achieve with the same capital in a direct property. The fee drag and absence of forced appreciation through active management are the primary reasons.

Best-fit profiles

DSTs tend to work well for investors who:

Are on day 40 of an exchange with no direct-property deal and face a six-figure tax bill. A DST that closes in 4 days and saves $120,000 in tax is worth the 15% fee load.
Are done managing property after years or decades of active ownership and want passive income without operational involvement.
Want diversification across property types and geographies that would require multiple direct-property transactions to achieve.
Have exchange equity in the $200,000 to $2,000,000 range, where DST minimums and fee structures are proportionally reasonable.
Are approaching or past retirement and value quality of life over maximum return.

Poor-fit profiles

DSTs tend to be the wrong choice for investors who:

Are skilled operators who can buy value-add properties, manage efficiently, and force appreciation through improvements. Their direct returns will likely exceed DST returns by 2-5% annually.
Need or may need liquidity within 5-7 years. The illiquidity is real and inflexible.
Have exchange equity below $200,000, where minimums and fee drag become proportionally larger.
Have exchange equity above $2,000,000, where direct property or institutional-quality assets become more accessible and the fee savings justify the management burden.
Evaluate a specific offering with excessive fees (above 18%), weak property fundamentals, high leverage (above 65% LTV), or an unproven sponsor.

The honest tradeoff

A DST can close in days, generate passive income, and defer your entire tax bill. It also charges 10-18% in embedded fees, locks your capital for 5-10 years, and hands every decision to someone else.

Neither side of this tradeoff is inherently better. The question is which set of constraints you are more comfortable accepting given your age, wealth, expertise, timeline, and priorities. The investors who are satisfied with DSTs are the ones who understood these tradeoffs clearly before committing capital, not the ones who were sold on the benefits alone.

The Bottom Line

DSTs aren't good or bad — they're appropriate or inappropriate depending on your situation. Investors done with management, facing tight deadlines, or seeking diversification benefit most. Investors who want control, need liquidity, or can generate higher returns through active management should look elsewhere.

Frequently Asked Questions

1031 to DST to 721 (UPREIT): How the Path Works

A growing number of investors are using a three-step strategy: 1031 exchange into a DST, then when the time is right, contribute the DST interest into a REIT's operating partnership via a 721 exchange. This path enables tax-deferred access to REIT diversification.

DST Due Diligence Checklist: What to Read in the PPM

The Private Placement Memorandum is the governing document for your DST investment. Most investors don't read it thoroughly. This checklist walks you through what to review and what questions to ask before committing capital.

DST Eligibility: IRS Revenue Ruling 2004-86 Explained

Before 2004, the IRS hadn't explicitly blessed Delaware Statutory Trusts as 1031 replacement property. Revenue Ruling 2004-86 changed that by confirming DSTs holding real property are treated as like-kind property for exchange purposes.