Zero-Coupon DSTs let investors defer taxes, build equity, and transition to passive real estate ownership—without ongoing cash flow.
For experienced real estate owners, selling a highly appreciated property often means facing a significant tax bill. While a Section 1031 exchange can defer capital gains, it presents its own challenges — tight timelines, debt replacement requirements, and the risk of returning to active management.
A Zero-Coupon Delaware Statutory Trust (DST) offers a compelling alternative: a passive investment structure that satisfies exchange rules and enables investors to step away from day-to-day property management, focusing instead on long-term wealth accumulation.
What is a Zero-Coupon DST?
A DST allows investors to own fractional interests in institutional-grade real estate while qualifying for a Section 1031 exchange. Zero-Coupon DSTs stand out in several ways:
- No cash flow during holding period — All rental income is used to pay down the mortgage, rather than being distributed to investors.
- High leverage — These offerings typically feature a 70 – 90% loan-to-value ratio, often supported by long-term leases to investment-grade tenants.
- Accelerated debt paydown — The structure rapidly reduces principal, building equity over time.
This approach enables investors to remain in real estate, defer taxes, and simplify their financial lives while transitioning away from active property management.
Why investors might choose Zero-Coupon DSTs
Zero-Coupon DSTs address key challenges for owners nearing the end of their real estate journey:
Debt replacement
High leverage helps satisfy IRS requirements by allowing investors to invest less equity while assuming significant debt, making it easier to replace debt from a highly leveraged property.
Tax-deferred wealth accumulation
With no annual income distributions, there is no taxable income during the holding period. Accelerated mortgage paydown and potential property appreciation grow equity tax-deferred until the property is sold.
Passive ownership
For those ready to leave behind “tenants, toilets, and trash,” Zero-Coupon DSTs offer professionally managed, institutional-quality real estate without day-to-day involvement.
Is a Zero-Coupon DST right for you?
Zero-Coupon DSTs can be an effective tool for certain investors, but they come with important considerations. These investments are illiquid and have a fixed holding period, making them unsuitable for those who need regular income or quick access to capital. Investors should also be aware of potential phantom income, as interest deductions decline over time, taxable income may appear even though no cash flow is received. Careful tax planning is essential to manage this risk.
Many investors incorporate Zero-Coupon DSTs as part of a blended portfolio, pairing them with traditional cash-flowing DSTs. This combination can help meet high debt replacement requirements, provide current income, and offset potential phantom income, creating a more balanced and tax-efficient investment strategy.
How CLA can help with investing
CLA’s wealth advisors and real estate professionals can help you make a confident transition from active management to passive real estate investment.
We begin by assessing whether structures like Zero-Coupon DSTs align with your goals and risk profile. From there, we guide you through the complexities of Section 1031 exchanges and DST investments, helping you achieve tax deferral while reducing administrative burdens.
Our team also designs customized portfolios that balance tax efficiency, long-term growth, and your desired level of involvement. Throughout the process, we coordinate closely with your legal, tax, and wealth advisors to enable a seamless experience.