The short answer
Pick a traditional DST if you need the exchange to pay you: it holds stabilized, managed property and distributes income. Pick a cash out DST if you do not need income and your problem is debt replacement, timing or later access to equity: it is leveraged at 80 to 90% against long net leases to investment-grade tenants, every dollar of rent goes to the lender, and value comes back through a refinance or the eventual sale. Many exchangers with a mortgage to replace use both, a small cash out slice to carry the debt and traditional trusts for the income. Both are illiquid, both can lose money, and run your own numbers with your CPA.
At a glance
| Traditional DST income | Distributions from stabilized property; not guaranteed |
|---|---|
| Cash out DST income | None during the hold; rent services and amortizes the loan |
| Cash out leverage | 80 to 90% on the cash out DSTs we place |
| Stated liquidity target | 80 to 90% of exchange value returned after the trust's refinance |
| Personal liability | Non-recourse in both; your invested equity is what is at risk |
| Debt relief rule | Debt you shed counts as cash received unless replaced |
| Phantom income | Principal paid from rent is taxable income to you with no cash |
The two structures are the same legal wrapper pointed at opposite goals
Both are Delaware statutory trusts treated under Rev. Rul. 2004-86 as grantor trusts whose owners hold undivided fractional interests in the real estate, which is why either can be 1031 replacement property. Both carry the same trustee limits: no new leases except on a tenant's bankruptcy or insolvency, no renegotiating or refinancing the acquisition debt, and only minor non-structural changes.
The traditional DSTs we place hold stabilized, professionally managed multifamily, medical office, self-storage and industrial property with financing, leases and income in place, typically at minimums of $100,000 to $250,000 per trust.
Our cash out DSTs, also called zero cash flow DSTs, hold triple-net leased property backed by investment-grade tenants on long-term leases, financed at 80 to 90% with non-recourse debt. All operating income goes to debt service and amortization, so investors receive no current distributions and are paid through later liquidity and the sale.
Cash flow: one pays you monthly, the other pays your lender and leaves you a tax bill
In a traditional trust, distributions come from rent after expenses, debt service and reserves. They are not guaranteed and can be cut if a tenant fails or costs rise; our page on distribution timing and reliability covers how sponsors set them.
In a cash out trust, you still owe tax on your share of the income. Rent is gross income, interest is deductible, and principal repayment is not: the Supreme Court in Commissioner v. Tufts explained that loan proceeds are not income and repaying the loan has no effect on tax liability. As the loan amortizes and interest falls, taxable income rises while distributions stay at zero, so you pay that tax from other money.
The zero cash flow DST explainer works through the year-by-year phantom income figures; the point for this decision is simpler. If you will need the money to live on, a cash out trust is the wrong tool for that slice.
Debt replacement: a small cash out slice can carry the whole mortgage
Reg. section 1.1031(d)-2 treats liabilities you are relieved of as money received. To defer fully, you must buy at least as much property as you sold and replace the debt you shed with new debt or added cash.
Hypothetical, round numbers: you sell for $3,000,000, pay off a $900,000 mortgage and send $2,100,000 to your intermediary. You place $180,000 in a cash out trust at a hypothetical 85% leverage, buying a $1,200,000 share of property carrying $1,020,000 of debt. The remaining $1,920,000 goes into debt-free traditional trusts. Total purchases are $3,120,000 and debt is $1,020,000, both above what you gave up.
This is the use our cash out DST page describes: solving debt requirements with a small portion of proceeds and freeing the rest for low-leverage investments. The cost is concentration of leverage in one trust and phantom income on that slice. Run your own numbers with your CPA.
- Too little debt replaced: the shortfall is boot, taxed in the year of sale.
- Too much leverage overall: higher exposure if the tenant fails or the property is worth less at sale.
- Right-sized slice: debt covered, the rest of the money in income-producing trusts.
Liquidity and timing: why the cash out structure promises later access and what limits it
Traditional DST money is illiquid until the sponsor sells, typically after a hold of five to ten years, and secondary sales are thin and usually discounted.
Our cash out DST is built for a later refinance that can return 80 to 90% of exchange value as cash without tax, because loan proceeds are not income. It also presents the structure as a way to complete the exchange now and choose permanent investments later. Rev. Rul. 2004-86 does not let a DST trustee refinance, so the refinance has to follow whatever path the offering documents set out, which may involve converting the trust under a springing LLC provision. Read how and when that happens, and what it does to your next exchange, before you subscribe.
Nonrecourse debt stays in the picture at the end. Tufts holds that the full nonrecourse balance is part of the amount realized on disposition, so a highly leveraged position can generate taxable gain larger than the cash it returns.
Who each fits, and the case for holding both
A traditional DST fits an owner replacing a rental they managed, who wants income, no management and diversification across several trusts at per-trust minimums of $100,000 to $250,000.
A cash out DST fits investors seeking liquidity without current income, those comfortable without distributions, and those facing debt replacement, tight timelines or uncertain markets. It is not for investors who need immediate income or want simplicity, because it adds layers of complexity.
The combination fits an exchanger with a mortgage to replace and a need for income: a cash out slice sized to the debt, traditional trusts for the balance. Compare that with the alternatives in our answer on replacing the mortgage or adding cash.
Related questions
Is a cash out DST still a valid 1031 replacement?
We structure cash out DSTs to be 1031-eligible, and the legal basis is the same Rev. Rul. 2004-86 analysis as any DST. What changes is the economics, not the qualification.
Will I get monthly income from a cash out DST?
No. These structures pay no monthly income; rent services the debt and value is realized through refinance and sale. You may still owe tax each year on income you never receive.
Am I personally liable for the 80 to 90% loan?
We work only with non-recourse financing for cash out DSTs, so your invested equity is at risk but not your personal credit. Lenders' carve-outs and their effect are covered on our DST lender documents page.
What does the trust need to happen for the refinance to work?
The property must support a new loan on the terms the offering assumed, which depends on the tenant, rates and value at that date. No refinance date is promised or guaranteed, so treat the timing as uncertain.
Can I put my entire exchange into a cash out DST?
You can, but you would have no income from the exchange and the most leverage and phantom income possible. Most allocations that use one size it to the debt that needs replacing.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.