The Oklahoma Bar Journal May 2026

Illiquidity. Individuals enter ing the DST need to be fully aware that their beneficial ownership interests are completely illiquid for a period of time. Once the investment is made, the principal cannot generally be returned to the investor until the DST initiates and completes a liquidity event. Complete absence of public secondary markets for DST inter ests. Since DST shares are illiquid, a public secondary market does not exist for investors (or others) to buy and sell their shares. However, there is a silver lining associated with this aspect: Since there is no public secondary market, the DST shares are marginally correlated to equity markets. Thus, their value tends to remain constant while traditional shares in equities see greater volatility as they are traded. Investors holding securi tized real estate, such as a DST, generally must demonstrate that they have a low need for liquid ity. Unfortunately, circumstances sometimes arise that change that dynamic, and when they do, investors in DSTs and other illiq uid assets will receive unsolicited, deeply discounted third-party offers for their interests. Long-term time horizons and holding periods. Typically, DSTs tend to exist between five and seven years before the sponsor will begin to consider initiating any type of liquidation process. During that time, if the DST is successful, it will pay (generally on a monthly basis) its beneficial owners a consistent distribution of the income derived from the underlying property. So an invest ment property holder using the §1031-to-DST strategy is at the mercy of the DST sponsor as to when they can exit the investment.

(SPE) to isolate financial risk on the specific real property. Not only does SPE creation add more time and start eating away at the 180 day rule, but the creation tends to generate more expenses, such as legal fees, for the investor. Relief from underperforming real estate. After factoring in the true costs of real estate ownership, many investors find they own property that provides little or no net income, but they are still hesi tant to sell and be forced to recog nize capital gains taxes along with DRT and NIIT. A §1031 exchange using a DST may provide a solu tion to increase cash flow while deferring any taxable event by replacing the property that is not generating sufficient cash flow with a DST designed to do so. Estate planning. Some inves tors prefer a role as an active real estate owner, while their heirs may wish to be passive owners. A DST can be a powerful estate planning tool since DST interests can be divided amongst beneficiaries, leaving each to decide what to do with their own portion, while the basis of the property steps up to fair market value (FMV) upon the original owner’s death. 20 This strategy is very effective for many owners of family farms. Family farm owners are often asset rich and cash poor; they understand the tax liability in selling the farm, and often, they have children who either do not want to take over the farm or cannot get the financ ing to purchase the farm from the parent that would enable the parent to retire. Not only does the §1031-to-DST strategy solve the exit and retirement problem, but it can also solve the estate distribu tion problem, as well.

Return to active manage ment. If the investor longs for the days of “tenants, toilets and trash” and wishes to return to actively managing investment real estate, the investor always retains that option. Once the DST liquidates, they can simply use the standard §1031 exchange via like-kind property swap and exit out of the passive management scenario (without incurring capital gain or triggering NIIT or DRT) and instruct the QI to acquire a directly owned real estate interest of their choosing. Eminent domain, destroyed property and §1033 exchanges. Investment properties that have been subject to eminent domain or destruction (fire, flood, etc.) may be eligible for a §1033 exchange. A §1033 exchange applies when a property is lost through casualty, theft or condemnation and incurs capital gains from the proceeds received to pay for the loss. 21 As in §1031 exchanges, a DST may be a replacement solution for these types of exchanges, too. 22 Similar to a §1031 exchange, if reinvested pro ceeds meet the requirements for the exchange, then capital gains may be deferred. However, unlike §1031, a §1033 exchange can be utilized by the investor even if the event took place in the past two or three years and even if the investor already took receipt of the proceeds. While the advantages of DSTs are compelling, there are several significant disadvantages that make the §1031-to-DST exchange an inappropriate investment for many investors. These disadvan tages include, but are not limited to, the following. Disadvantages of Using DSTs in §1031 Exchanges

Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.

MAY 2026 | 29

THE OKLAHOMA BAR JOURNAL