A Delaware Statutory Trust and a real estate investment trust can both give an investor exposure to real estate, but they are not interchangeable. They differ in how interests are offered, how easily they can be sold, how properties are managed, how fees are disclosed, and how tax rules may apply. This comparison is general information; a tax or investment professional should assess a specific situation.
The basic distinction
A DST holds real property through a trust. Investors buy beneficial interests under offering documents, and some DST offerings are private placements with eligibility limits set by the offering documents. In Revenue Ruling 2004-86, the IRS concluded that a taxpayer may exchange real property for an interest in the particular Delaware statutory trust described there without recognition of gain or loss under section 1031, if the other requirements of section 1031 are satisfied. Qualification depends on the structure and the transaction.
A REIT is a company or trust that meets statutory requirements and generally invests in income-producing real estate or related assets. Publicly traded REITs are listed on a stock exchange, and their shares can be bought through a broker. Non-traded REITs are registered with the SEC but do not trade on an exchange, and private REITs are offered as private placements. “REIT” therefore describes a business structure that can take several forms, not one uniform product.
Liquidity and control
Public REIT shares can generally be bought or sold on an exchange, subject to market conditions and the availability of buyers. That liquidity does not protect an investor from price declines, because share prices reflect market conditions and may fall.
A DST interest is not listed on an exchange, so there may be no ready market and transfers may be restricted by the governing documents. In the structure described in Revenue Ruling 2004-86, the trustee’s activities are limited and the owners are treated as holding beneficial interests rather than managing the property. A non-traded REIT generally cannot be sold readily on the open market, so an investor should never assume that “REIT” means immediate liquidity.
Costs to compare
For a REIT, start with the company’s filings and shareholder reports. Look for management or advisory fees, property-level expenses, acquisition and disposition costs, financing costs, and other operating expenses. Non-traded and private REITs may charge additional offering and management fees, so read the offering documents.
For a DST, read the offering memorandum and fee schedule, which should describe the fees and expenses charged in connection with the offering and the property. Some costs may be paid from property revenue. Compare projected cash flow after all expenses, not just the distribution headline. Also consider the effect of leverage, reserves, and refinancing.
A useful comparison asks: What is the total annual expense burden? What fees are paid to affiliates? Which costs are fixed, and which rise with revenue or transactions? What happens if occupancy falls or financing becomes more expensive? The answers matter more than a single percentage.
Tax considerations
A qualifying 1031 exchange can defer recognition of gain in circumstances described by tax law, and since 2018 section 1031 applies only to exchanges of real property. Replacement property generally must be identified within 45 days and received within 180 days after the relinquished property is transferred. REIT shares are stock rather than real property, and an exchange of real property for stock should not be assumed to qualify. Selling property and buying REIT shares should not be assumed to produce the same tax result.
REIT distributions can include different components; IRS Publication 550 discusses ordinary dividends, capital gain distributions, and nondividend distributions (return of capital). The tax character can vary from year to year. Under Revenue Ruling 2004-86, the owner of an interest in the DST described there is treated as owning an undivided fractional interest in the underlying property for federal income tax purposes. The details depend on the investment and the investor’s tax position, so professional advice is important.
Diversification and risk
A public REIT can hold many properties, regions, and property types. A single DST may hold only one property or a limited portfolio. More diversification can reduce concentration risk, but it cannot remove real-estate, interest-rate, tenant, or market risk.
Debt deserves separate attention. Higher rates can pressure property income and valuations. A loan maturity can create refinancing risk. Interests that are not publicly traded can be hard to value, and a steadier statement value is not proof that an asset cannot lose value.
A comparison checklist
Before investing, identify whether the interest is publicly traded, non-traded, or private; how it is purchased and sold; and what restrictions apply. Review the assets, tenants, geographic exposure, debt, maturity dates, reserves, projected hold period, and exit assumptions. Compare all recurring and transaction fees. Ask how distributions are funded and whether they could be reduced.
For a DST, ask whether the proposed exchange meets the investor’s tax requirements and whether a qualified intermediary is involved. For a REIT, review filings, risk factors, debt, funds from operations measures, and distribution policy. Do not treat a projected return as a guarantee.
Bottom line
A DST may be relevant to an investor seeking a private, passive real-estate interest and potentially compatible 1031 replacement property. A public REIT may offer easier trading and broader diversification. Neither is automatically cheaper, safer, or more appropriate. Compare net costs, liquidity, taxes, concentration, debt, and control against the investor’s time horizon and need for cash.
Public sources
- https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
- https://www.irs.gov/pub/irs-drop/rr-04-86.pdf
- https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
- https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-65
- https://www.law.cornell.edu/uscode/text/26/1031
- https://www.irs.gov/publications/p550
- https://delcode.delaware.gov/title12/c038/sc01/
