Can I buy a DST in my IRA or 401k plan?

An IRA can hold a DST interest, but the purchase is never part of a 1031

Nothing in the Code bars an IRA from owning real estate or a beneficial interest in a trust; the IRS retirement plan investments FAQ lists the prohibited categories as collectibles and life insurance. What you need is a custodian that holds alternative assets and an offering whose documents accept IRA subscribers.

What you cannot do is route an exchange through it. Under section 408(a)(1) an IRA accepts contributions only in cash and only up to the annual limit, apart from rollovers from other retirement accounts. Sale proceeds from a rental held outside the IRA are not a rollover. And the IRA has no gain to defer, so section 1031 has no work to do inside it.

If you are choosing between the two routes for the same money, self-directed IRA vs 1031 sets them side by side, and buying a DST without a 1031 covers cash purchases generally. The accreditation test still applies to the person behind the account; see DST accredited investor rules.

Leverage turns part of the trust's income into taxable UBTI

Rents from real property are normally excluded from an exempt account's unrelated business income. Section 514 overrides that for debt-financed property, and IRS Publication 598 confirms IRAs, Roth IRAs, SEP-IRAs and SIMPLE IRAs are subject to the tax. Because a DST is a grantor trust under Rev. Rul. 2004-86, the IRA is treated as owning its share of the building and its share of the mortgage.

The taxable fraction is average acquisition indebtedness divided by average adjusted basis, applied to income and to gain on sale. Publication 598 allows a $1,000 specific deduction, and Form 990-T is required once gross unrelated business income reaches $1,000. The 2025 Form 990-T instructions tax exempt trusts at trust rates, and the trust schedule reaches 37% above $15,650 of taxable income.

Worked example: a 50% loan makes half the IRA's share taxable

Hypothetical round numbers, not a projection; run your own numbers with your CPA. Your IRA buys a $100,000 interest in a trust financed at 50%, so its share is $200,000 of property and $100,000 of debt. Suppose the IRA's share of net rental income for a year is $8,000.

With debt at half of basis, $4,000 is debt-financed income. After the $1,000 specific deduction, $3,000 is taxable at the trust rates, and the IRA's custodian files Form 990-T and pays the tax from the account. On sale, the same fraction of gain is taxable if the debt is still in place within the 12 months before the sale.

An all-cash trust has no acquisition debt, so the same income would be excluded rent. That is the main reason retirement-account buyers look at debt-free DSTs.

401(k) plans have a narrow exception, and most plans will not allow it anyway

Section 514(c)(9) removes real-property acquisition debt from the calculation for a 'qualified organization', which includes a trust qualified under section 401 but not an IRA. The exception fails if the price is not fixed, if the debt depends on the property's income, if the property is leased back to or financed by the seller or certain plan insiders, and under further conditions for property held through partnerships and other pass-through entities.

Whether a DST interest held by a plan meets those conditions is a question for the plan's counsel. In practice the first barrier is the plan document: most employer 401(k) menus offer funds only, and a plan that permits self-directed real estate is usually a solo or small-employer plan.

Prohibited-transaction and plan-asset rules decide which trusts will take you

Section 4975 bars any sale, loan or lease between your IRA and a disqualified person, which includes you and certain family members. Your IRA can buy an interest from an unrelated sponsor; it cannot buy one from you, and you cannot personally guarantee anything for it. If you engage in a prohibited transaction, section 408(e)(2) says the account stops being an IRA as of the first day of that year.

Sponsors have their own limit. Under the Labor Department's plan asset regulation, if benefit-plan investors, a term that includes IRAs, hold 25% or more of any class of equity, the entity's assets can become plan assets. A trust agreement filed with the SEC as Exhibit 10.2 to a 2021 Form 8-K bars ERISA plans from acquiring 25% or more of its interests. So an offering may close its retirement-account allotment before it closes to everyone else.