REIT or 1031 DST? Don’t Let the Word “Trust” Fool You

A plain-language guide for investors who keep hearing both terms and aren’t sure how they differ.

The Confusion Starts with One Word

If you’ve researched ways to reinvest proceeds from a property sale, you’ve likely come across both Real Estate Investment Trusts (REITs) and Delaware Statutory Trusts (DSTs). Both have “trust” in the name. Both let you own real estate without managing it yourself. It’s a reasonable assumption that they work the same way for tax purposes — but they don’t.

Shares vs. Real Property

A REIT is a company. When you invest in a REIT, you’re buying shares of that company, the same way you’d buy shares of any corporation. The REIT owns, operates, or finances the real estate; you own a share of stock. Under IRS rules, a share of stock is personal property, not real property — regardless of what kind of assets sit behind it.

A DST is different. When you invest in a 1031 DST, you acquire a pro rata beneficial interest in a trust that holds title to real property. In Revenue Ruling 2004-86, the IRS addressed the conditions under which this kind of beneficial interest can be treated as a direct interest in real estate rather than a security.

That distinction in ownership is the reason the two are treated differently under the tax code.

Why It Matters for a 1031 Exchange

Section 1031 of the tax code allows an investor to defer capital gains tax by exchanging real property for other “like-kind” real property. Because REIT shares are personal property, they don’t qualify, regardless of how much real estate sits inside the REIT’s portfolio. Selling REIT shares is a taxable event, the same as selling any other stock.

A DST interest is different. When a DST is properly structured and meets the requirements of Revenue Ruling 2004-86, an investor exiting a relinquished property may be able to acquire beneficial interests in that DST as replacement property and defer the gain. When the DST eventually sells its underlying property, the investor may have the option to exchange into another qualifying DST — or another eligible real estate investment — to continue deferring.

How Many Properties Are You Actually Investing In?

This distinction is easy to miss, but it affects both diversification and risk.

A REIT can own a large, diversified portfolio — depending on the REIT, that could mean dozens or even hundreds of properties across different markets and property types. A DST offering is typically much more concentrated. Many DSTs hold a single property, such as a multifamily community, a storage facility, or a medical office property; some even hold a small portfolio of properties.

In practice, that means a REIT investment often spreads your money across many properties you’ll never individually evaluate, while a DST investment lets you know the specific property, or properties, you’re invested in.

It’s a common misconception that REITs offer comparable tax benefits to direct real estate ownership. They don’t, and in some respects the opposite is true. DST investors can typically benefit from pass-through depreciation and interest deductions, which may offset a portion of the income the investment generates.

REIT dividends don’t work that way, and here’s the piece that’s easy to miss: a REIT avoids paying corporate-level tax because it’s required to distribute at least 90% of its taxable income to shareholders every year. That’s the trade a REIT makes — and it’s a key reason an investor generally receives a dividend rather than the depreciation benefit a direct owner may receive. The REIT typically applies those deductions at the corporate level before the income ever reaches the shareholder as a dividend.

Because a REIT investor owns a security rather than a direct interest in real estate, that dividend is generally taxed as ordinary income to the shareholder, without a depreciation pass-through and without 1031 deferral available when shares are sold. For an investor specifically trying to defer gain from a property sale, a REIT generally isn’t structured for that purpose.

Not All REITs Are the Same

Part of the confusion is that “REIT” isn’t one thing. Publicly traded REITs are bought and sold on an exchange like any stock, priced continuously by the market. Non-traded REITs are not listed on an exchange — shares are typically valued periodically rather than priced minute-to-minute, and getting money back out often depends on a share repurchase program with its own limits and timing, rather than simply placing a sell order. It doesn’t change the core point here: REIT shares generally do not qualify as replacement property in a 1031 exchange.

Neither Investment Is Without Risk

Publicly traded REITs are easy to buy and sell, but their share prices tend to track the broader stock market rather than the real estate itself, and values can decline. Non-traded REITs are harder to value and harder to exit.

DSTs carry different risks. They’re illiquid — there’s no public market to sell into, and the sponsor controls the timing of any sale. As with any real estate investment, there’s no guarantee of income or return of principal.

Where REITs and DSTs Actually Overlap

The similarities are real, and they’re part of why the two get confused. Investors in both structures:

• Receive distributions from the income the investment generates
• Have no deeded title to the underlying property, and therefore no personal liability — both are non-recourse
• Aren’t required to disclose personal financial information to a lender
• Have no property management or operating responsibilities

The Bottom Line

A REIT answers the question, “How do I own diversified real estate without managing it?” A 1031 DST answers a different question: “How do I defer the tax on a property I’m selling while staying invested in real estate?” They’re not competing versions of the same idea — they’re different tools designed for different goals, built on different legal foundations. (Some investors do eventually move from a DST into a REIT through a separate structure called a 721 exchange — a topic worth its own discussion another time.)

If your goal is tax deferral on a property sale, the structure matters as much as the real estate itself. Understanding what you actually own — a security or a direct interest in real property — is one way to help determine whether an investment fits that goal.

This article is for general educational purposes only and does not constitute tax, legal, or investment advice. 1031 exchanges and DST investments involve risk, including illiquidity and the potential loss of principal, and are suitable only for accredited investors who meet specific investment objectives. Whether a particular DST interest qualifies as replacement property in a 1031 exchange depends on its specific structure and facts and circumstances. Consult your tax and legal advisors regarding your individual circumstances.