Selling Investment Property? How to Decide Between Buying Another Property or Using a DST

After selling investment real estate, many owners completing a 1031 exchange focus first on finding a replacement property. However, there is a more important question that should come first.

What role do you want real estate to play in your life going forward?

A 1031 exchange allows investors to continue tax deferral by reinvesting into qualifying replacement property. That replacement property may be directly owned real estate, or it may be a Delaware Statutory Trust (DST).

Both strategies can satisfy the requirements of a 1031 exchange. Beyond that similarity, they create very different ownership experiences.

The decision is not whether direct ownership or a DST is better. The decision is which structure aligns with the investor's objectives at this stage of ownership.

Understanding the differences in control, management responsibility, diversification, financing, and liquidity can help investors determine which approach fits their long-term goals.

Control and Management: The Primary Difference

The biggest distinction between direct ownership and DST investing is control. With direct real estate ownership, the investor remains the decision maker.

The owner can determine:

• Which property to acquire
• How the property is financed
• When improvements are made
• How leases are negotiated
• When the property is eventually sold

For many investors, that control is valuable. It allows them to influence the outcome through active decision-making and operational improvements.

However, control also creates responsibility. Even with third-party property management, direct ownership often requires involvement with:

• Tenant issues
• Capital improvements
• Financing decisions
• Market changes
• Unexpected property needs

For investors who enjoy operating real estate, that involvement may be a benefit. For others, particularly after decades of ownership, the responsibility may no longer align with their lifestyle.

How DST Ownership Changes the Investor Experience

DSTs create a different relationship with real estate. Rather than owning and managing an entire property, investors own a fractional beneficial interest in a trust that owns institutional real estate.

The sponsor is responsible for:

• Property management oversight
• Tenant relationships
• Financing decisions
• Asset management
• Disposition strategy

The investor gives up operational control in exchange for a passive ownership structure.

This trade-off is intentional.

DSTs are often considered by investors who want to remain invested in real estate and continue tax deferral but no longer want the responsibilities associated with being a landlord.

Many investors do not move from direct ownership to DSTs because their view of real estate changed. It is more so their desired role as a property owner changed.

For some, the transition is less about investment performance and more about simplifying the next phase of ownership.

Access and Diversification Differences

Direct ownership often creates concentrated exposure. An investor completing a 1031 exchange may purchase one or two replacement properties based on available capital, geography, and the opportunities available during the exchange period.

This concentration may be acceptable for investors comfortable evaluating and managing specific assets. DSTs provide a different approach.

Because investors purchase fractional interests, capital can potentially be allocated across:

• Multiple properties
• Different geographic markets
• Various property sectors
• Multiple tenants and lease structures

Examples may include:

• Multifamily communities
• Industrial properties
• Medical office assets
• Net lease properties

Diversification does not eliminate risk, but it changes the type of risk an investor accepts. The comparison is between concentrated control and passive diversification.

Debt Replacement Considerations

Debt replacement is an important part of many 1031 exchanges. Investors generally must replace both equity and debt from the relinquished property to achieve full tax deferral. With direct ownership, the investor typically secures financing for the replacement property.

This process may involve:

• Loan underwriting
• Personal guarantees
• Lender approvals
• Interest rate negotiations

DST financing works differently. Debt is typically established at the trust level before investors enter the offering. This may simplify the exchange process because investors receive their proportionate share of the existing debt without obtaining individual financing.

However, the investor also cannot modify that debt. The sponsor controls financing decisions, including loan terms and future strategy.

The appropriate structure depends on whether the investor values flexibility and control or prefers simplicity and passive ownership.

Liquidity and Exit Planning

Both direct real estate and DST investments are illiquid, but the nature of the illiquidity is different. A direct property owner controls when they attempt to sell. The process may take time, but the owner determines the timing.

DST investors generally do not control the exit. The sponsor determines when the property is sold based on the investment strategy and market conditions.

DST investments commonly have anticipated holding periods, and there is generally no established secondary market for selling interests.

Investors considering DSTs should evaluate:

• Future liquidity needs
• Income requirements
• Estate planning goals
• Expected investment timeline

A DST should typically be funded with capital intended to remain invested for the full anticipated hold period.

How to Choose the Right Approach for Your Situation

The decision between direct ownership and DST investing depends on the investor's priorities.

Direct ownership may align with investors who:

• Want control over decisions
• Enjoy managing real estate
• Have access to attractive opportunities
• Want flexibility around improvements and disposition timing

DST ownership may align with investors who:

• Want passive real estate exposure
• Prefer professional management
• Seek diversification
• Want to reduce landlord responsibilities

Neither approach is universally better. They simply solve different problems.

The important question is what the investor wants real estate ownership to look like after the exchange.

Conclusion

Direct property ownership and DST investments can both serve as replacement property solutions within a 1031 exchange.

The difference is the ownership experience. Direct ownership provides control, flexibility, and active decision-making. DSTs provide passive ownership, institutional management, and potential diversification.

The appropriate choice depends on the investor's objectives, lifestyle preferences, liquidity needs, and long-term wealth strategy. For many investors, the decision is not just about replacing real estate. It is about determining what role real estate should play in the next phase of their financial life.

A structured planning discussion can help evaluate whether direct ownership, DST investments, or a combination of both best aligns with the investor's exchange requirements and long-term goals.

General Disclosure