DST Liquidity Myth Exposed: What Investors Actually Need to Know

Liquidity is one of the most misunderstood aspects of Delaware Statutory Trusts (DSTs). DSTs are intentionally illiquid to meet the requirements of passive ownership and 1031 exchange eligibility. Confusion typically arises when the liquidity constraints of the structure are evaluated after capital has already been committed.

DST liquidity is not a flaw, and it is not a feature that can be adjusted later. It is a structural characteristic that supports the tax treatment and governance of the investment. Once capital is placed into a DST, the liquidity profile is fixed.

DSTs are not illiquid by accident. They are illiquid by agreement.

Understanding how and when liquidity occurs, and just as importantly when it does not, is essential before using a DST as part of a 1031 exchange or long-term real estate plan. 

What Investors Usually Mean When They Ask About Liquidity

When investors ask whether a DST is liquid, they are often asking several questions at once, even if they do not phrase them that way.

They may be asking:

• Can I sell my interest if I need cash
• Can I exit early if my plans change
• Can I rebalance my portfolio on demand

In many investment contexts, these are reasonable expectations. In a DST, they reflect a misunderstanding of the structure. DSTs are not designed to accommodate investor-driven exits. Once capital is invested, it is committed until the underlying property is sold.

Why DSTs Are Structurally Illiquid

DSTs are designed to qualify as real estate for 1031 exchange purposes. To maintain that status, investors must remain passive and the structure must remain stable.

That stability requires limits on control and transferability.

What this structure requires:

• Investors cannot actively manage the asset
• Interests cannot be freely traded
• Capital structure must remain fixed

These restrictions are not optional. They are foundational requirements for tax qualification.

Liquidity is restricted not to disadvantage investors, but to preserve tax treatment.

How Liquidity Actually Occurs in a DST

Liquidity in a DST occurs through a single mechanism: the sale of the underlying property.

What that means in practice:

• Liquidity occurs at sponsor-determined exit
• Timing depends on market conditions and financing
• Investors receive proceeds at disposition

There is no redemption feature, no periodic liquidity window, and no ability for investors to force a sale. Liquidity is event-based, not investor-driven.

This distinction is critical. DSTs should be evaluated as long-duration commitments, not flexible allocations.

The Secondary Market Reality

Some investors may hear about secondary markets for DST interests and assume this provides flexibility. In practice, these markets are very limited and opportunistic.

What secondary markets typically involve:

• Limited buyer demand
• Discounted pricing
• No guarantee of execution

Secondary markets exist on the margins. They are not deep, reliable, or consistent. They should not be treated as a liquidity solution when evaluating a DST.

Why Liquidity Expectations Create Problems

Liquidity only becomes an issue when DSTs are used for the wrong capital.

Problems tend to arise when:

• Investors allocate capital that may be needed short-term
• Life events force early exits
• DSTs are treated as flexible reserves

DSTs are not designed to solve short-term liquidity needs. When used that way, the structure feels restrictive. When used as intended, it provides stability.

How Experienced Investors Think About DST Liquidity

Sophisticated investors do not ask whether a DST is liquid. They ask whether they can afford for it not to be.

They focus on:

• Matching DST hold periods to long-term capital
• Maintaining separate liquid reserves
• Using DSTs for capital that does not require flexibility

Liquidity planning happens before the investment, not after. DSTs are selected intentionally, not reactively.

Liquidity in the Context of a 1031 Exchange

DSTs are often chosen under time pressure during a 1031 exchange. That urgency can cause liquidity considerations to be minimized or deferred.

Common mistakes include:

• Allocating too much exchange capital to DSTs
• Ignoring future cash needs
• Assuming refinancing or early exits will be available

Once invested, options narrow quickly. Liquidity assumptions made under pressure tend to surface later, when they can no longer be addressed.

Conclusion

DST liquidity is not a flaw. It is a structural feature that supports tax deferral and passive ownership.

The liquidity myth persists because DSTs are compared to investments they are not meant to resemble. When expectations are realistic, DSTs can play a valuable role. When they are not, frustration is almost inevitable.

A structured planning discussion can help determine whether the liquidity profile of a DST aligns with an investor’s broader capital needs before flexibility is exchanged for tax deferral and passivity.

General Disclosure