Common Questions About 1031 Exchanges & DST Properties

Access Available DST Properties
Get started in less than 5 minutes.

1031 Exchange Basics & Eligibility

  • A 1031 exchange (derived from Section 1031 real estate tax code) allows an investor to defer paying capital gains tax on the sale of an investment property by reinvesting the proceeds into a "like-kind" replacement property. This process, often called 1031 exchanges in real estate, is a powerful tool for wealth preservation.

  • The process involves selling your "downleg" property through a qualified intermediary 1031 exchange facilitator, identifying replacement property within 45 days, and closing on the "upleg" property within 180 days to fully defer taxes.

  • Under 1031 exchange rules, "like-kind" simply means the properties must be held for investment or business use. You can exchange an apartment building for a triple net (NNN) property, or raw land for an office building; they do not need to be the exact same type of asset.

  • Properties must be held for productive use in a trade or business or for investment. Most real estate types qualify, including land, commercial buildings, and rental houses, under the broad definition of like-kind property.

  • There is currently no limit. Investors can continue to swap properties and defer taxes indefinitely, which is often referred to as the "swap 'til you drop" strategy.

  • When an owner dies holding property from a 1031 exchange, the heirs typically receive a "step-up in basis" to current fair market value, effectively eliminating the deferred tax liability.

  • It is tax-deferred. You are postponing the payment of taxes. The tax only becomes due if you sell the final property in the chain for cash without performing another exchange.

  • Yes. You can use a 1031 exchange 1 property for 2 strategy (or more) to diversify your portfolio, provided the total value of the replacement properties meets the 1031 exchange requirements for value and debt replacement.

  • Yes, a 1031 exchange 2 properties for 1 is allowed. You can consolidate the proceeds from multiple sales into a single, larger investment property, provided you follow the 1031 exchange rules.

  • No, a 1031 exchange cannot be used for a primary residence. It is strictly for property held for investment or business use. However, converted rentals may qualify under specific 1031 primary residence rules.

1031 Exchange Critical Rules & Timelines

  • The 1031 exchange timeline is strict: you have 45 days from the sale of your "downleg" property to formally identify a replacement, and a total of 180 days to close on that property. Missing these 1031 exchange deadlines will result in the exchange failing and the gain becoming taxable.

  • A 1031 qualified intermediary (also called an exchange facilitator) is a required third party who holds the sale proceeds in escrow. Under rules for 1031 exchange, the investor cannot touch the money during the process, or the exchange is disqualified. Finding a reputable qualified intermediary 1031 exchange provider is the first step in the process.

  • The 3-property rule is one of the most common 1031 rules for identification. It allows you to identify up to three potential replacement properties of any value, regardless of the eventual purchase price.

  • The 1031 exchange 45 day rule requires you to formally identify potential replacement properties in writing to your QI within 45 days of closing the sale of your relinquished property.

  • The 1031 exchange 180 day rule requires you to complete the purchase and close on your replacement property within 180 days of the sale of your original property.

  • Missing any 1031 exchange deadline is usually fatal. The IRS rarely grants extensions, and the failed exchange will result in the full gain being recognized and taxed.

  • Identification must be made in a written document, signed by you, and delivered to the 1031 qualified intermediary. It must unambiguously describe the property address.

  • The 200 percent rule allows you to identify any number of replacement properties, provided their combined fair market value does not exceed 200% of the property you sold.

  • The 95 percent rule allows you to identify any number of properties, but only if you actually acquire at least 95% of the total value of all identified properties.

  • Item Most experts recommend a 1031 hold period of at least 1-2 years to prove investment intent rather than intent to flip.

  • No. The list of identified properties is final once the 45-day identification period has expired.

  • The 1031 safe harbor for vacation homes requires you to rent the property for at least 14 days and limit personal use to 14 days or 10% of rental days per year.

Delaware Statutory Trusts (DST) & Passive Investing

  • A Delaware Statutory Trust (or DST) is a legally recognized entity that allows multiple investors to own fractional interests in high-quality, professionally managed commercial real estate. 1031 delaware statutory trusts are popular because they offer a passive investment solution for those who no longer want to manage tenants.

  • A 1031 exchange into delaware statutory trust property is treated by the IRS as a direct interest in real estate. This allows an investor to fulfill their 1031 exchange investment options quickly, often closing in as little as 3–5 days, which is helpful when facing a tight 1031 exchange deadline.

  • Under Revenue Ruling 2004-86, an interest in a delaware statutory trust is treated as a direct interest in real estate, making it eligible for 1031 treatment.

  • Pros include professional management and diversification. Cons include lack of control and illiquidity. They are popular passive real estate 1031 exchange options.

  • Yes. Many delaware statutory trusts have minimums as low as $100,000, allowing for easy diversification of 1031 proceeds.

  • The typical dst hold period is 5 to 10 years, depending on when the sponsor decides the market is optimal for a sale.

  • DSTs typically distribute monthly or quarterly cash flow derived from rental revenue after operating expenses and debt service.

  • In a TIC, up to 35 owners have direct deeded interest. In a DST, the trust holds title, allowing for more than 35 investors and simpler management.

  • Yes. The trustee and asset manager handle everything, making 1031 delaware statutory trusts ideal for "tired landlords."

  • In a master lease structure, the trust leases the property to a single "master tenant" who manages operations and sub-leases to occupants.

  • These are IRS restrictions: trustees cannot accept new capital, renegotiate loans, or make major structural improvements once the trust is formed.

Advanced Scenarios & Tax Strategy

  • While you generally cannot perform a direct 1031 exchange into reit shares (because shares are considered paper assets, not real property), many investors use a 721 exchange (also known as an UPREIT) to eventually move their real estate equity into a REIT structure.

  • Boot is any non-like-kind property received in an exchange, such as cash or mortgage reduction. If you do not meet the requirement for reinvesting net equity or fail to replace your debt, the difference is considered taxable boot.

  • A reverse 1031 exchange occurs when you buy the replacement property before you sell your current property. This is a complex strategy often used in competitive markets to secure a property before the 1031 exchange timeline even begins.

  • A 721 exchange allows a property owner to contribute real estate to a REIT's operating partnership in exchange for shares (units).

  • You can exchange the real estate owned by a business, but not the business itself or its inventory.

  • Yes. A 1031 exchange commercial to residential is allowed if the residential property is held as a rental.

  • A triple net or NNN property is a lease where the tenant pays for taxes, insurance, and maintenance.

  • An improvement 1031 exchange allows you to use proceeds to construct a new building or renovate a replacement property.

  • No. Under section 1031 real estate rules, U.S. property is not like-kind to property located outside the United States.

  • You must follow the 1031 exchange vacation home safe harbor rules regarding rental days and limited personal use.

  • Many investors seek a triple net (NNN) lease property for their exchanged real estate because the tenant is responsible for taxes, insurance, and maintenance. This creates a "mailbox money" scenario for the investor.

1031 Exchange Logistics

  • Boot is any non-like-kind value received (cash or debt relief). If you receive boot, that portion of the gain is taxable.

  • A 1031 exchange calculation example involves subtracting basis from the sale price to find realized gain. Only recognized gain (boot) is taxed.

  • A 1031 qualified intermediary is essential for holding sale proceeds and ensuring the transaction complies with rules for 1031 exchange.

  • Generally, no. They are "disqualified persons" if they provided other services to you recently. You need an independent qualified intermediary 1031 provider.

  • 1031 exchange documents specify "exchange expenses" (like commissions) which can be paid using proceeds without creating boot.

  • To avoid "mortgage boot," your new mortgage must be equal to or greater than the mortgage on the property you sold.

  • It is a tax on prior depreciation. A 1031 exchange defers both capital gains and depreciation recapture tax.

  • You must reinvest the entire net sales price (equity plus debt) to fully defer all taxes.

  • Key 1031 exchange documents include the Exchange Agreement and the Formal Identification Notice provided by your QI.

  • Most states follow federal rules, but some have 1031 state tax "clawback" provisions or unique recognition rules.