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Taxation of REITs vs DSTs - Which is More Tax Efficient?

Readers of our weekly blogs know that we advocate looking at after tax returns when comparing investments. While Real Estate Investment Trusts (REITs) and Delaware Statutory Trusts (DSTs) can both provide a means of investing in real estate, the income and capital gains that investors may receive from these investments are treated differently. In this blog, we will discuss the differences and provide answers to commonly asked questions. Let’s start by discussing REITs.

What is a REIT?

A REIT is a company that generally owns and manages real estate assets. The REIT investment structure was created in 1960 to provide investors the opportunity to invest in a diversified portfolio of larger scale income producing properties and potentially realize ongoing income and appreciation. REITs have become very popular and collectively own $4.5 trillion of gross assets in the US.1

Taxation of Income from REITs 

Calculating taxes from REIT distributions or dividends can be complicated. 

First, distributions can be comprised of up to three types of income – all of which are taxed differently. 

  • Ordinary Income: Most of the income produced by REITs is derived from property rents and, for tax purposes, is considered ordinary income and taxed at prevailing federal and state tax rates, passed through to investors, is considered ordinary income, just as if it had been earned through an LLC or partnership and passed through to an owner.
  • Qualified REIT Dividends: Depending on the timeframe over which the REITs generated income that was subsequently paid to investors, a portion of the income may be eligible to be taxed at a lower rate than for ordinary income. This is often referred to as a capital gains distribution. 
  • Return of Capital: A portion of the dividend may consist of a return of original invested capital which is not taxed. This commonly occurs when the REIT’s table income is reduced by depreciation deductions that cause the dividends to exceed the REIT’s profits. A Return of Capital will lower the investors basis in the investment and potentially result in higher capital gains taxed when the REIT interests are sold.  

Secondly, REIT investors do not directly own real estate – they own shares of stock (or operating units) in a company that owns the real estate. As a result, the income that is received is reported on the 1040 federal and applicable state tax forms as “Interest and Dividends.” 

REIT investors normally receive a Form 1099-DIV summarizing their dividends at the end of the tax year. 

Qualified Business Tax Deduction 

The Tax Cuts and Jobs Act of 2017 created a new tax deduction called the Qualified Business Income Deduction. Also referred to as the Pass-Through Deduction, this allows investors to reduce their taxable income from REITs (and other pass-through sources) by as much as 20%. Unfortunately, this deduction is currently set to expire in 2025. 

Taxation of Capital Gains When REIT Interests are Sold

When REIT interests are sold, the proceeds are subject to capital gains taxes currently ranging up to 20% plus applicable state taxes. While there are tax deferral strategies for these gains including Qualified Opportunity Zone investments, REIT investors cannot reinvest their proceeds via a 1031 exchange. This is a major distinction that may be viewed as a drawback to investing in REITs. 

What is a DST?

A DST (Delaware Statutory Trust) is a separate legal entity created under the laws of Delaware in 2004 to hold title to one or more income producing properties. A DST offering can be any type of investment property including apartments, office buildings, retail, senior housing, etc.

Like a REIT, an individual DST may hold title to multiple properties at one time, although the number of properties in a DST is generally far less than in a typical REIT. 

Each investor owns a “beneficial interest” in the trust which owns the underlying Real Property. Per IRS tax code2,  the DST interest is treated as being equivalent to holding title and, most importantly, qualifies the investment as an acceptable replacement property option for completing 1031 exchanges.  

Taxation of Income from DSTs

Ongoing income received from DSTs are treated in the same manner as income received from traditional income real estate investments. At the end of the tax year, DST investors receive a Grantor’s Letter which may contain a Form 1099 or income and expense statement. This information is used to complete a Schedule E to calculate taxable income. The Schedule E is my favorite tax form since it allows real estate investors to deduct items such as depreciation, interest, and related business investment expenses e.g., home office, travel expenses, tax preparation, etc. Through taking advantage of Schedule E deductions, many of our clients can significantly reduce their taxable income and put more money in their pocket as compared to income received from non-real estate investments. 

Taxation of Capital Gains When DST Interests are Sold

When DST interests are sold, investors may be burdened with combined federal and state liabilities that could range to a combined total of up to 40%. Fortunately, investors have the option to defer up 100% of their taxes though completing another 1031 exchange. In contrast to a sale of REIT interests where capital gains taxes reduce the total amount of funds that can be reinvested, proceeds from the sale DST interests can fully reinvested qualifying like-kind properties via a 1031 exchange. 


Both REITs and DSTs can be attractive real estate investment options.  

REITs generally have greater appeal to investors who 1) wish to invest for the long-term, 2) do not want to be burdened with completing 1031 exchanges every few years, 3) wish to have greater investment diversity, 4) wish to have greater liquidity options relative to DSTs, and 5) wish to invest retirement funds. 

DSTs generally appeal to investors who 1) are seeking replacement properties to complete a 1031 exchange, and 2) cash investors who are attracted to specific DST properties or who would like to first gain some experience with DSTs prior to making larger DST investments in the future. 

For further information on REITs and DSTs including a list of current investment options offered by our firm, please contact us at or schedule a meeting with me here

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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