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When investing in a Delaware Statutory Trust (DST), one of the most important decisions is whether to choose a leveraged, debt-financed structure or an all-cash structure. Both can be effective tools in a 1031 exchange, but they serve different objectives and carry different implications.

Below is a simple framework to help you understand how debt impacts planning, returns, and risk.

Key Considerations Before Choosing Debt or No Debt

Debt affects more than just income. It influences long-term strategy, tax planning, and exit flexibility.

Using Debt to Meet 1031 Requirements

Debt in a DST is often used to structure a 1031 exchange properly. Investors who sell leveraged real estate must replace both equity and debt to fully defer taxes. DSTs are particularly effective for this because they provide access to institutional, non-recourse financing that is not tied to an investor’s personal balance sheet. In other words, the debt assumed inside a DST satisfies exchange requirements without appearing on an individual’s credit profile.

This raises an important question for all cash investors. If you are not required to replace debt, should you still take on leverage? And for investors with minimal debt, does increasing leverage improve long-term outcomes, or does it simply introduce unnecessary risk?

The answer depends on more than income.

It requires evaluating how debt affects capital efficiency, downside exposure, future exchange flexibility, and the overall durability of the investment structure.

Using Leverage to Add New Depreciable Basis

Debt can play an important role in tax efficiency through depreciation.

Many long-term property owners reach a point where most or all of their depreciable basis has been exhausted. At that stage, income may still be high, but the ability to offset that income with depreciation is limited. By acquiring new real estate through a leveraged DST, investors effectively purchase a larger asset using a combination of equity and debt. This creates a new depreciable basis tied to the full property value rather than just the cash invested.

In practical terms, adding debt allows investors to access more real estate and therefore a larger depreciation schedule. That additional depreciation can help shelter a portion of ongoing income and improve after-tax cash flow. For investors who are already fully or largely depreciated, this can be a meaningful tax benefit that an all-cash structure may not provide.

Of course, depreciation should never be the sole reason to assume leverage. But when aligned with sound underwriting, asset quality, and long-term strategy, the ability to create a new depreciable basis can be an important part of an overall tax and income plan.

Debt can reduce the impact of fees.

DSTs typically include upfront fees of 8-12%. In a leveraged structure,

those fees are effectively spread between equity and debt. This means investors are exposed to a lower fee load relative to their invested equity than under an all-cash structure.

For example, if an investor allocates $1 million to an all-cash DST and the total fee load is 10%, the investor is effectively paying $100,000 in upfront costs on their equity. In a comparable DST with 50% leverage, those same fees are applied to the total property value, not just the investor’s cash. Because half of the capital structure is debt, only a portion of the fees is borne by the investor’s equity. In this scenario, the effective fee load on the $1 million equity investment may be closer to 5% rather than 10%. While the total fees at the property level remain the same, leverage can materially reduce the percentage of costs relative to the investor’s invested capital. This is one reason debt can improve capital efficiency when used responsibly and within well-underwritten structures.

Debt can enhance equity returns.

Leverage can amplify appreciation on invested capital.

For example, in a $100M all cash DST, a $1M investment represents 1% ownership. In a $100M DST with 50% leverage, the equity is $50M, so the same $1M investment represents 2% ownership. If the property appreciates, the leveraged investor captures a greater share of the equity growth.

While simplified, this demonstrates how leverage can materially increase returns on equity when performance is strong. As with fees, the underlying asset does not change, but the capital structure alters how value creation is allocated to investors.

Understanding Leverage Risk

Leverage increases both potential upside and downside.

For example, imagine a DST valued at $100M with 50% leverage, consisting of $50M in investor equity and $50M in debt. If the property experienced severe operational issues and had to be sold for $40M, the lender would be paid first. In that scenario, investors could risk losing their entire equity.

This type of risk is most pronounced in single-tenant properties, where the performance of one tenant drives the entire investment. In contrast, diversified portfolios and well-underwritten multifamily properties typically have stronger operating fundamentals and multiple income streams, reducing the risk of total loss. While no real

Estate investment is risk-free; structure and asset quality matter.

How debt affects future 1031 planning

If you assume debt in a DST today and later decide to move back into direct real estate through another 1031 exchange, that debt must be replaced. In other words, the financing you take on now becomes part of your future reinvestment requirements.

For investors planning to remain in passive real estate long term, this may not be a major concern. But for those who anticipate returning to active ownership, debt should be carefully evaluated as part of overall exit planning.

Access to Inventory

Many DSTs are leveraged, and some of the strongest real estate opportunities are structured responsibly with debt. Limiting a portfolio to only all-cash offerings can significantly reduce available options. By considering both leveraged and all-cash structures, investors can focus on the quality of the real estate rather than being constrained by structure alone. In many cases, top-tier properties and markets are only accessible through leveraged offerings.

Income versus total strategy

Cash investments generally yield higher current income. But income alone should not drive the decision.

With DSTs, sponsors must balance capital preservation, exit strategy, market positioning, and long-term risk. In some cases, a modest level of debt can create a more durable structure for investors over the life of the investment.

If You Prefer to Stay All Cash

All cash DSTs remain a valid and often attractive option, especially for investors seeking lower volatility and higher current income.

However, in all-cash structures, the exit strategy becomes even more important. Without leverage to enhance returns, the investment must deliver sufficient long-term returns to offset upfront costs and preserve capital. Not every asset class or property type is well-suited to this structure, which is why underwriting and long-term positioning matter.

Why It Matters Who You Work With

Not all advisors understand real estate.

DSTs are often presented as financial products, but at their core, they are ownership interests in commercial real estate. Evaluating them properly requires experience with property operations, leasing risk, debt structures, market cycles, and exit strategy, not just yield and marketing materials.

An advisor who truly knows real estate will look beyond headline returns and ask the hard questions. How resilient is the asset in a downturn? How is the debt structured, and what happens if performance softens? Does the exit strategy realistically support capital preservation after fees? Is the underwriting conservative or overly aggressive?

The DST industry is not heavily standardized, and offerings can vary widely in quality.

Working with someone who has deep, hands-on real estate experience can make a meaningful difference in managing risk and protecting your capital.

Final Thoughts

There is no universal answer to whether debt is better or not. The right structure depends on your risk tolerance, income needs, tax strategy, and long-term real estate goals.

What matters most is understanding how leverage changes both risk and reward and ensuring that every investment is underwritten with a clear plan for operations, market conditions, and exit.

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This article is for general educational purposes and is not tax, legal, or investment advice. Before you move forward with any 1031 exchange, you should consult your own CPA, tax adviser, and attorney.