Completing a 1031 exchange is one of the most effective tools available for deferring capital gains taxes after selling investment real estate. While the IRS tax code outlines strict timelines and compliance requirements, most investors quickly learn that the real challenge is not the mechanics of the 1031 Exchange — it’s choosing the right replacement strategy.
For most investors, replacement options fall into two broad categories:
- Purchasing direct commercial real property, often single-tenant or multi-tenant assets
- Investing in a Delaware Statutory Trust (DST)
Both options qualify as ‘like-kind’ real estate under Section 1031. Both allow capital gains and depreciation recapture taxes to be deferred when structured properly. Despite that similarity, the ownership experience, flexibility, and long-term financial outcomes can be very different.
Below is a practical comparison of the two approaches, with an emphasis on how each impacts control, flexibility, financial performance and strategy.
1031 Exchange Tax Treatment
From a tax standpoint, direct ownership of real commercial property and DSTs are equal.
Both structures qualify as replacement property under 1031 rules and offer full tax-deferral potential when executed correctly. The IRS does not favor one over the other.
The distinction begins after the 1031 exchange is complete.
Investment Universe
When purchasing real commercial property directly, investors have access to thousands of commercial properties nationwide across office, industrial, retail, medical and specialized asset classes. This breadth allows investors to align property selection with geographic preferences, tenant profiles, lease structures, and long-term investment objectives. Fountainhead Commercial is based in Colorado but we provide consultative commercial real estate brokerage services anywhere in the United States. If you’re based in TX and want to purchase a property in FL, we can help. If you’re based in CA and want to purchase a property in TN, we can help. Fountainhead Commercial has a national database of commercial investment properties and works in cooperation with licensed real estate brokers in every state so you’re not limited by geography.
DST investments, by contrast, are limited to sponsor offerings available at a given time. While many sponsors are experienced, investors are choosing from a curated menu of usually 10-30 options rather than the open market.
For investors who value choice and strategic alignment, direct real commercial property ownership offers far greater flexibility.
Upfront Fees
Direct real commercial property acquisitions do not include sponsor-level upfront fees. While there are transaction costs associated with any purchase (e.g. real estate attorney, title company), investors are not paying the embedded sponsor fees commonly found in DST offerings. At Fountainhead Commercial, when our clients make a commercial real estate purchase, the commission earned is almost always paid by the seller of the property.
DST investments often include sponsor fees that can total up to 6% of invested equity, baked into the structure of the offering.
Over time, these upfront costs can materially impact net investment returns.
Year-One Yield Expectations
Direct commercial real estate returns are market-driven. Depending on asset type (e.g retail, industrial, medical office), lease structure, and risk profile, first-year yields commonly range from 6%–8%, though results vary.
DST distributions are offering-specific and typically fall in the 4%–6% range, also variable and dependent on underwriting assumptions.
While yield alone should never drive a 1031 Exchange decision, direct real property ownership often provides greater upside through execution and market-driven performance.
Operational Control
This is one of the most meaningful differences.
With direct real property ownership, investors retain full control over decisions related to:
- Property selection
- Financing
- Leasing strategy
- Capital improvements
- Management
- Timing of sale or refinance
DST investors intentionally relinquish control. All operational and strategic decisions are made by the sponsor in accordance with the trust’s governing documents.
Some investors value this passivity. Others see control over their largest investment as essential.
Management and Oversight
Direct real property ownership allows investors to select property management, monitor performance closely, and make changes when conditions evolve. Oversight can be hands-on or delegated, but total authority remains with the owner.
DST investors have no direct oversight. Reporting and execution flow through the sponsor and third-party managers.
This distance a DST provides is attractive for some — very restrictive for others that value having a say regarding their largest investment.
Passivity
Both strategies can be relatively passive, but they are passive in different ways.
- Direct real property ownership can be structured to minimize day-to-day involvement while retaining strategic authority. For instance, properties with ‘Absolute NNN’ leases require little-to-no oversight…just deposit the check that arrives in your mailbox monthly!
- DSTs are fully passive by design, with no investor involvement beyond initial selection.
The key distinction is not effort — it’s control.
Exit Strategy and Liquidity
Real estate markets are cyclical and evolve over time. So are personal/family goals, tax strategies, and business financial needs.
Direct real property ownership provides flexible exit options. Investors can sell when market conditions are favorable to maximize their rate of return; refinance to access equity when interest rates are low, hold long-term, or time dispositions around estate planning or future exchanges.
DST investments are illiquid. Investors are typically locked in until the sponsor decides to sell the underlying property. When that sale occurs, proceeds must be reinvested — often into another DST with upfront fees — to maintain tax deferrals.
For investors who value optionality and flexibility, direct real commercial property ownership offers a clear advantage.
Financing and Leverage
Direct real property ownership allows investors to determine if and how leverage (aka financing) is used. Financing terms can be negotiated, refinanced, or restructured as conditions change.
DST financing is pre-arranged and fixed for the life of the trust. Investors cannot require the sponsor to refinance or adjust leverage, even if market conditions improve. Be aware that sponsors must disclose any financing, but it can be buried in the fine print. If you’re buying the DST all-cash, be certain that sponsor is not burdening you with debt without your knowledge. Any debt you assume through a DST will impact all future transaction(s) and attempts to defer capital gains taxes.
For investors who view financing as a strategic tool – one to utilize or one to avoid, this difference is significant.
Tenant Profile and Strategy
With direct real property ownership, tenant selection and lease terms are investor-driven. This allows alignment with risk tolerance, tenant-credit quality preferences, and long-term investment plans.
DST tenant profiles vary by offering, but investor choice is limited to what the sponsor has assembled.
Investment Size
Direct real commercial property ownership typically requires larger equity commitments, with $1 million equity minimums being common for institutional-quality assets.
DSTs allow for lower minimum investments, often ranging from $25,000 to $250,000, which can be attractive for diversification or partial exchanges. For instance, if you invest $1 million in a real commercial property but have $1.1 million of proceeds from your relinquished property sale, you could invest the remaining $100K in a DST for 100% deferral.
Final Perspective
Both direct commercial real property and DSTs can satisfy the technical requirements of a 1031 exchange.
The difference is not tax treatment.
The differences are control, flexibility, investment performance and strategy.
DSTs can serve a purpose for investors seeking fully passive income with minimal involvement on smaller 1031 Exchange purchases. However, they come with permanent structural limitations that should be clearly understood before committing your hard-earned capital.
For investors who want to shape outcomes, control decisions, manage risk proactively, and align real estate with their long-term investment objectives, direct ownership of commercial real property remains the preferred strategy for Fountainhead Commercial’s clients.
How Fountainhead Commercial Helps
Successfully executing a 1031 exchange into real commercial property requires more than finding a building. It requires accurate timing, coordination, market knowledge, quality property underwriting, and disciplined execution.
Fountainhead Commercial specializes in guiding investors through real commercial property 1031 Exchange acquisitions, helping clients evaluate strategy, identify suitable replacement properties, manage strict exchange timelines set by IRS, negotiate aggressively, and think long-term beyond the closing table.
Our role is not to sell products (such as DSTs) with significant upfront fees.
Our role is to help clients make confident, informed commercial real estate investment decisions. As a Certified Commercial Investment Member (CCIM), Fountainhead Commercial can promise that your next 1031 Exchange purchase is handled professionally, thoroughly and with the greatest care possible.
But don’t take our word for it…Here is what a few of our clients say:
“I engaged Lowrey Burnett, CCIM to provide his expertise and assist with the purchase of multiple investment properties in multiple out-of-state cities. Lowrey performed a very thorough nationwide search and identified numerous high-quality investments that aligned with my investment criteria. Before the 1031 Exchange deadline, I closed on 4 different income-producing properties in 4 different cities as part of our diversification strategy. We successfully deferred 100% of the capital gain taxes…estimated savings of $3.5M!
If you intend to invest in commercial real estate anywhere in the U.S., I recommend that you also take advantage of Lowrey’s experience, expertise, and professionalism. He worked very hard for me & I’m sure he will do the same for you.”
-Medeiros Family
“We wanted to take this opportunity to provide a testimonial regarding our experiences with Fountainhead Commercial, and specifically Mr. Lowrey Burnett. To put it simply, we will not hesitate to seek out Mr. Burnett, moving forward, if we are engaging in a 1031 Exchange process. Our experience and time with Lowrey was a pleasure, and the outcome of our 1031 Exchange was exactly what we were seeking.
We were introduced to Lowrey by our wealth management team when we sold our properties, and wanted to pursue an exchange. This was our first time going through the process, so we were a bit apprehensive, uncertain, and worried that we wouldn’t be able to get the type, nor quality, of portfolio we wanted within the parameters, and rigid timing, required for a 1031 Exchange. From a professional standpoint, Lowrey made the process as easy as it could be, and we found him to be responsive, efficient, collaborative, and diligent in the performance of his job. His time management and organizational skills were also exceptional. Ultimately, with his support, we have acquired properties that we like, in good locations, with sound tenants and reasonable lease terms, and did so within the confines of the exchange path.
Personally, we also enjoyed our time with Lowrey. He made a point of meeting us at every property, which we really valued, and coordinating our visits in a seamless manner, all of which afforded us time to get to know each other. We found him to be personable and interesting, and we appreciated the chance to learn about his life, his wife, his dogs, and his active outdoor adventures, among other things. He was also a very attentive listener, and took genuine interest in our history. He made a concerted effort to better understand our preferences, concerns, wants, and needs, and did so while concurrently, and effectively, navigating the negotiations, and needs of the process, to keep everything moving forward, and on track, to meet time sensitive deadlines.
It is our pleasure, then, to offer this testimonial on behalf of Fountainhead Commercial, and Mr. Lowrey Burnett. If you need to complete a 1031 Exchange, you will be in good hands with Mr. Burnett, and would be wise to have him on your team.”
-Kuperman Family
