Investor’s Guide to Deferring Taxes with DSTs and UPREITs
Real estate investors know that appreciation is a double-edged sword: while your portfolio grows, so does the tax burden lurking behind a future sale. Capital gains taxes, depreciation recapture, and state-level levies can erode years of effort in a single transaction. Fortunately, the tax code provides sophisticated tools to defer these liabilities and keep your capital compounding.
Two of the most effective structures are Delaware Statutory Trusts (DSTs) and Umbrella Partnership Real Estate Investment Trusts (UPREITs). When used together, they create a powerful path to tax deferral, passive income, diversification, and long-term estate planning flexibility.
This guide explains how each works, where they shine, and how they fit into a modern wealth strategy.
The Role of DSTs in Tax-Deferred Real Estate Investing
A Delaware Statutory Trust is a legal entity that holds one or more income-producing properties. Investors buy beneficial interests in the trust, becoming fractional owners without taking on the responsibilities of active management. For many, the DST becomes the ideal landing spot for a 1031 exchange.
Core advantages of DST investing
• Passive ownership
The DST sponsor handles leasing, operations, financing, maintenance, and eventual disposition. Investors enjoy income without landlord duties, often for the first time in decades.
• Built-in diversification
Rather than reinvesting into a single asset, DSTs allow investors to spread equity across multiple property types or locations—reducing concentration risk.
• Institutional-grade access
DSTs commonly own large-scale assets like distribution centers, medical facilities, grocery anchors, or multifamily communities that would otherwise be inaccessible to individual buyers.
• Estate planning simplicity
DST interests are easy to divide among heirs, avoiding legal complications tied to physical real estate. Beneficiaries step into passive income rather than active management.
How DSTs Function Inside a 1031 Exchange
DSTs qualify as “like-kind” replacement property under IRS Revenue Ruling 2004-86, making them a compliant and efficient solution for 1031 exchange investors.
The 1031-to-DST process
Sell the relinquished property
A Qualified Intermediary (QI) holds the proceeds, preventing constructive receipt.Identify replacements within 45 days
DSTs help simplify this step, since investors can review sponsor-approved offerings rather than sourcing properties themselves.Complete the purchase within 180 days
Instead of buying a building, the investor acquires beneficial interests in the DST. The DST closes quickly and cleanly—ideal for exchanges under time pressure.
A properly executed DST exchange defers 100 percent of capital gains and depreciation recapture, preserving investment capital for continued growth.
Introducing the UPREIT: The Next Stage of Tax-Deferred Planning
While DSTs excel at creating passive income and simplifying ownership, many investors eventually seek liquidity or broader diversification. This is where UPREITs enter the picture.
An UPREIT is a structure in which a public or private REIT holds properties through an operating partnership. Investors can contribute real estate—including interests in DSTs—to the partnership in exchange for OP units, typically without triggering a taxable event.
Why UPREITs appeal to long-term investors
• Improved liquidity
OP units can often be converted into REIT shares, which are easier to sell than buildings. Investors gain optional liquidity without giving up tax deferral.
• Continued deferral of capital gains
The exchange of property or DST interests for OP units is generally non-taxable, allowing the investor to keep compounding wealth inside a larger pool of assets.
• Diverse exposure
As part of a broader portfolio, OP unit holders benefit from many properties—different tenants, markets, and sectors—rather than a single asset.
• Passive income with professional oversight
UPREIT investors receive distributions tied to the REIT’s performance, offering a stable, hands-off income stream.
Using DSTs and UPREITs Together for Long-Term Planning
For many investors, the most effective strategy is a two-step progression:
1031 into a DST → later contribute DST interests into an UPREIT.
Why this pairing works so well
Immediate tax deferral through the 1031
The DST satisfies strict exchange timelines and eliminates management responsibilities.Optional liquidity and long-term flexibility via the UPREIT
After a required holding period (often two years), investors may exchange their DST interests for OP units, joining the REIT ecosystem.Inheritance becomes simpler
OP units and REIT shares are easy to divide among heirs and may receive a step-up in basis, potentially eliminating deferred gains entirely.A smoother transition from active ownership
Investors move from holding a physical asset → to a passive DST interest → to a diversified, professionally managed REIT portfolio.
This approach allows investors to keep their equity growing while eliminating the operational friction that often comes with aging assets or life transitions.
Building and Preserving a Real Estate Legacy
The combination of DSTs and UPREITs gives investors more control over how—and when—they recognize taxes, access liquidity, and pass wealth to future generations. Instead of selling a property, triggering taxes, and resetting your investment base, these structures help maintain momentum and keep capital compounding.
By using a DST for the 1031 exchange and leveraging an UPREIT for future flexibility, investors can:
• convert illiquid real estate into long-term passive income
• diversify without taxable events
• protect wealth during estate transitions
• reduce the burden on heirs
• maintain a strong, tax-efficient investment footprint
For those looking to simplify life, preserve capital, or build a multigenerational plan, the DST-to-UPREIT path can be one of the most effective strategies available.
