The Oklahoma Bar Journal May 2026

The §1031-to-DST exchange strategy is not appropriate for all real estate investment holders.

properly managed or if minor repairs are futile. Thus, it is imper ative to evaluate the operational results and reputation of each DST sponsor to mitigate this risk. General real estate risks. Just as in holding any physical real prop erty, DST beneficial owners assume the same general and market-related risks of changes in cap rates, varia tions in occupancy, loss of tenants, loss of principal, rising interest rates, limited liquidity and inflation. Accredited investor status. Like most private placement and securitized real estate investments of an illiquid nature, DSTs can only accept accredited investors as defined by the Securities and Exchange Commission (SEC). 23 To meet the definition, an investor must have a net worth (excluding the primary residence and personal property) that is $1 million or more (trusts not formed for the specific purpose of acquiring the securities being offered must have total assets greater than $5 million, but this high threshold can be waived for grantor trusts where each trustee meets the individual criteria for being an accredited investor). If the investor fails that net worth test, then the investor can qualify by providing the past two years of tax returns showing at least $200,000 of individual income or $300,000 in joint spousal income. Many

investors who possess lower-valued real property, such as rental houses for college students, might find the accredited investor status require ment barring their use of a DST. Tax law changes. While the §1031 exchange has existed since 1921, 24 it tends to be a candidate for elimination (or is often used as a negotiation tool) during tax policy discussions on Capitol Hill. Even though it is unlikely to be elimi nated, it is not immune to sub stantial changes, such as when the sale of personal property became ineligible for §1031 exchange bene fits, as occurred in 2017. 25 The most recent major legislation (the One, Big, Beautiful, Bill Act 26 (OBBBA)) resulted in no changes to §1031, DSTs or the like-kind definition. Further, the OBBBA placed no new limitations, caps or phaseouts on §1031 transactions. 27 Again, while the sun still shines on §1031 exchanges, new legislation can always bring about a sunset.

Conversely, if the investor holds on to their physical property, the investor retains the freedom to sell it at any time they deem beneficial. Complete lack of investor control. As stated in the previous example, the investor loses decision control when entering the DST. The decision of when to sell the DST is determined by the sponsor. Unlike traditional stocks, there are no voting rights associated with an investor’s beneficial ownership interest. When a DST is sold, the investor can roll over sale proceeds into another DST ( e.g. , keep kicking the proverbial tax can down the road until death when beneficiaries can receive a step-up in cost basis), exchange the sales proceeds into a new directly held property or cash out and pay taxes. Fees and costs. DST invest ments tend to be more expensive than other traditional investments. They also incur relatively high management fees (to pay for the professional team operating it), which eat into the investor’s yield, unless significant tax savings from deferral can be obtained. Inflexibility of structure. As previously mentioned, DSTs are prohibited from refinancing, making capital improvements or amending/altering the lease terms. Properties held in a DST could fall into dereliction if not

One Last §1031 Wrinkle – §721 UPREIT Exchange – You Need to Know

The intersection of DST investments, IRC §1031 like kind exchanges and so-called “UPREIT” transactions presents one of the more sophisticated and consequential tax planning crossroads in modern real estate

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.

30 | MAY 2026

THE OKLAHOMA BAR JOURNAL