Leveraging an Overlooked Tax-Advantaged Strategy

How DSTs May Help Your Clients Invest More Tax-Efficiently

When your clients think about tax-efficient investing, they probably consider strategies involving retirement accounts, municipal bonds, or tax-managed mutual funds. However, for clients who own investment property, there is another, often-overlooked opportunity that could help them reduce taxes while maintaining real estate exposure, the Delaware Statutory Trust (DST).

Many property owners have spent years building equity in their real estate holdings. But when it comes time to sell, they often face the reality of significant capital gains taxes. DSTs offer a powerful, tax-advantaged strategy to help these clients reinvest without triggering immediate tax liabilities, all while transitioning to passive, professionally managed real estate investments.

What Makes DSTs a Powerful Tax Strategy?

DSTs are legal trust structures that enable fractional ownership in institutional-quality real estate. Investors purchase a beneficial interest in the trust, which holds the property title. This structure not only simplifies real estate investing but also unlocks multiple tax benefits when paired with the 1031 exchange.

The Key Tax Benefits of DSTs

1031 Exchange Eligibility

One of the most compelling benefits of DSTs is their eligibility for 1031 exchanges. This allows your clients to sell their investment property and reinvest the proceeds in a DST without recognizing capital gains at the time of sale. The tax deferral can be repeated through future exchanges, creating a powerful tool for long-term wealth preservation.

DSTs also provide a streamlined solution for completing a 1031 exchange. Rather than rushing to identify and close on a new property within strict IRS timelines, your clients can select from pre-packaged DST offerings that meet all regulatory requirements, saving them time and reducing execution risk.

Depreciation Deductions

In addition to tax deferral, DST investors may benefit from depreciation deductions. Depreciation allows property owners to offset a portion of their rental income with non-cash expenses, reducing their taxable income. While investors must consult their tax advisor, DSTs typically pass through depreciation benefits proportionally to their investors, helping to further improve potential after-tax returns.

Potential Estate Planning Advantages

DSTs may also support estate planning strategies. Upon an investor’s passing, the deferred capital gains tax liability may be eliminated through a step-up in basis, resetting the value of the investment to its fair market value for heirs. This may provide tax efficiency not only during the investor’s lifetime but also as part of their broader legacy planning.

Important Tax-Related Considerations

While DSTs offer meaningful tax benefits, they also come with certain limitations that you and your clients should understand.

Strict 1031 Exchange Timelines

The 1031 exchange process comes with strict deadlines. Property owners must identify replacement property within 45 days of the sale and complete the exchange within 180 days. Although DSTs simplify this process by providing ready-to-invest options, the timeline still requires proactive planning and execution.

Complex Tax Reporting

DST investors typically receive annual tax statements that include details about income, expenses, and depreciation. Depending on the DST structure and the investor’s personal tax situation, reporting can be more complex than with other investment types. It is important to advise your clients to work with a qualified tax professional to ensure proper compliance.

Limited Control Over Tax Planning

Because DSTs are managed by professional sponsors, investors do not have control over when the property is sold or how certain tax decisions are made. While this simplifies the investment experience, it may limit flexibility for clients who prefer direct control over their tax strategies.

How DSTs May Potentially Complement Tax-Efficient Portfolio Strategies

DSTs can play an important role in helping your clients build tax-efficient portfolios, particularly those who already hold appreciated real estate. By deferring capital gains taxes, generating potential depreciation deductions, and providing stable income streams, DSTs offer multiple layers of tax advantages. 

These benefits may complement other tax-advantaged strategies your clients may already use, such as retirement accounts or municipal bond holdings.

Additionally, DSTs help clients maintain real estate exposure without the operational burden of property management. This allows them to focus on long-term wealth management while continuing to participate in one of the world’s most enduring asset classes, real estate.

By helping your clients explore DSTs, you can expand your value as a trusted advisor and open new opportunities for tax-efficient wealth management.

Explore Tax-Advantaged DST Strategies with CAI Investments

At CAI Investments, we specialize in helping investment advisors and their clients unlock the potential of DSTs. Our offerings are designed to provide meaningful tax advantages while delivering access to high-quality, professionally managed real estate.

Schedule a call with our team today to learn how DSTs may help your clients invest more tax-efficiently.