Frequently Asked Questions

A 1031 exchange, named for Section 1031 of the Internal Revenue Code, lets a real estate investor sell investment property and defer the capital gains tax by reinvesting the proceeds into like-kind replacement property. It postpones the tax; it does not erase it.

You sell the relinquished property and a qualified intermediary holds the proceeds; within 45 days you identify replacement property in writing, and within 180 days you close on it. The exchange is reported on IRS Form 8824.

No. It defers capital gains tax and depreciation recapture by carrying your basis forward. If you hold the final property until death, your heirs may receive a stepped-up basis that can eliminate the deferred gain.

Any owner of U.S. real property held for investment or business use — individuals, LLCs, partnerships, trusts, or corporations. The same taxpayer that sells must generally acquire the replacement.

For a meaningful gain you intend to keep invested in real estate, usually yes — the tax deferred far exceeds the cost. For a small gain, or if you want unencumbered cash, paying the tax may be smarter.

There is no limit. Investors chain exchanges across decades, and a step-up in basis at death can eliminate the accumulated deferred gain for heirs.

U.S. real property held for investment or productive use in a trade or business. Since the 2017 Tax Cuts and Jobs Act, only real property qualifies.

For real estate, like-kind is broad: almost any investment real property is like-kind to almost any other — land for an apartment building, office for retail. It refers to the nature of the property, not its grade.

No. Primary residences use the Section 121 exclusion instead — up to $250,000 of gain tax-free for singles and $500,000 for married couples filing jointly.

Only if it's held for investment and meets the IRS safe harbor in Revenue Procedure 2008-16 — rented at fair market value at least 14 days a year with limited personal use, for the two years before the exchange.

No. Property held primarily for resale (dealer property) doesn't qualify; it must be held for investment.

No. U.S. real estate is only like-kind to other U.S. real estate, and foreign for foreign.

Yes. A Delaware Statutory Trust interest is recognized as eligible replacement property under IRS Revenue Ruling 2004-86.

Not directly — REIT shares aren't like-kind real estate. You can 1031 into a DST and later use a 721 exchange to move into a REIT while deferring tax.

45 calendar days to identify replacement property in writing, and 180 calendar days total to close. Both clocks start the day your sale closes and run concurrently.

On the day the relinquished property closes and transfers — Day 0.

Generally no, except IRS relief for taxpayers affected by a federally declared disaster.

It still counts. Unlike many tax deadlines, the 1031 periods aren't pushed to the next business day.

Up to three of any value (three-property rule), or any number under the 200% rule if their combined value is within 200% of what you sold. The 95% rule allows more if you acquire at least 95% of the value identified.

The exchange fails and the sale becomes a fully taxable event that year.

The 180-day window is capped at your tax-return due date including extensions; file an extension to preserve the full window.

An independent party that holds your sale proceeds so you avoid constructive receipt — required for a valid 1031 exchange.

No. Taking actual or constructive receipt of the proceeds disqualifies the exchange.

Any value you receive that isn't like-kind real estate — usually leftover cash or net debt relief. It's taxable up to your gain, even in a valid exchange.

Buy replacement property of equal or greater value, reinvest all your equity, and replace the debt you paid off (or substitute cash).

Yes. A fully qualifying exchange defers the unrecaptured Section 1250 recapture (taxed at up to 25%) along with the capital gain.

Yes — a partial exchange. You pay tax on the cash (boot) and defer the rest of the gain.

IRS Form 8824, filed with the return for the year the relinquished property was transferred.

One where you acquire the replacement property before selling the relinquished one, using an Exchange Accommodation Titleholder to park a property under IRS Revenue Procedure 2000-37.

For a standard delayed exchange, the qualified intermediary fee is modest, plus normal transaction costs. Reverse and construction exchanges cost several times more.

California tracks deferred in-state gain when you exchange into out-of-state property and requires annual reporting on FTB Form 3840 until it's recognized.

Under Section 1031(f), exchanges with a related party generally require both parties to hold for two years; an early disposition can unwind the deferral.

A trust that holds income-producing real estate and sells fractional beneficial interests to investors. The IRS recognizes a properly structured DST interest as direct ownership of real estate, making it eligible 1031 replacement property.

Yes. IRS Revenue Ruling 2004-86 treats a properly structured DST interest as a direct interest in real estate, making it eligible replacement property.

DST interests are securities offered through private placements, generally available only to accredited investors meeting SEC income or net-worth thresholds.

Minimums vary but commonly range from about $25,000 to $100,000 for 1031 investors. Because a DST can accept precise amounts, it's used to place an exact slice of proceeds.

To complete a 1031 exchange passively — deferring tax while owning a hands-off, diversified interest in institutional real estate — and to absorb leftover equity a direct purchase can't.

It varies widely by offering and is never guaranteed. Returns come from regular distributions plus any gain at sale; evaluate them net of all fees.

No. They're targets supported by the property's cash flow and can be reduced or suspended. Watch for payouts that exceed cash flow, which may be a return of capital.

Typically three layers: an upfront load, ongoing management fees, and a disposition fee at sale. They vary by sponsor and are disclosed in the PPM.

No. They're illiquid with no public market; your capital is generally committed until the sponsor sells, often in five to ten years.

Yes. DSTs are speculative and can lose value or principal through market declines, leverage, tenant problems, or sponsor missteps.

IRS restrictions from Revenue Ruling 2004-86 that keep a DST passive and 1031-eligible: it generally can't raise new capital after closing, refinance or borrow, reinvest sale proceeds, make major improvements, retain excess cash, or sign or renegotiate leases — except in tenant bankruptcy.

On Schedule E. Because a DST is treated as direct real-estate ownership, you report your share of income, expenses, and depreciation from the sponsor's annual grantor letter — not a partnership K-1.

Often, yes. Because it can accept almost any dollar amount, investors use a DST to absorb leftover equity and defer the full gain rather than leaving taxable cash boot.

Many DSTs include pre-arranged non-recourse financing, and your share of that debt counts toward your debt-replacement requirement — without you personally qualifying for a loan.

A leveraged DST held in an IRA can generate unrelated debt-financed income (UDFI/UBIT). A debt-free DST or a REIT may avoid the issue — confirm with your CPA before investing through a retirement account.

Most target a five-to-ten-year hold, though timing depends on the market and the sponsor's plan. You don't control when the sale happens.

The sponsor sells and returns capital. You then cash out and pay the deferred tax, complete another 1031 exchange, or — if offered — a 721 exchange into a REIT to keep deferring.

A DST is a fractional interest in specific properties that qualifies for a 1031 exchange; a REIT is a share in a diversified portfolio company that generally does not. REITs are more liquid; DSTs are 1031-eligible.

A DST requires a real-estate sale and defers the gain; an Opportunity Zone fund accepts any capital gain and can eliminate tax on the fund's appreciation after ten years.

A 721 exchange (an 'UPREIT' transaction) contributes real estate into a REIT's operating partnership in exchange for operating-partnership (OP) units, deferring the capital gains tax under Section 721.

Operating-partnership units — limited-partnership interests in a REIT's operating partnership, received in a 721 exchange. They're economically equivalent to REIT shares and pay matching distributions.

To exit active real estate for good while deferring tax — moving from a single property into a diversified, semi-liquid REIT position that's easy to pass on to heirs.

No. Because it's a contribution to a partnership rather than a like-kind exchange, the 721 doesn't carry the 1031's deadlines; timing follows the REIT's process.

A 1031 keeps you in directly owned real estate you can exchange again; a 721 contributes property to a REIT's operating partnership for OP units, deferring tax but generally ending future 1031s.

No. OP units are a partnership interest, not like-kind real property, so you can't 1031 back into real estate. The 721 is a one-way move.

A sequence: first a 1031 into a DST to defer tax and stay flexible, then a 721 exchange at the DST's full-cycle into the REIT — continuing the deferral without a taxable event in between.

Neither step does — both defer. Tax is generally triggered later, when OP units are converted to REIT shares or redeemed for cash.

On a Schedule K-1. The holder is a limited partner reporting a distributive share of income, with §704(c) built-in-gain allocations and distributions generally nontaxable to the extent of basis.

Yes. Converting OP units to REIT shares, or redeeming them for cash, generally triggers the deferred gain. Many investors convert gradually to spread the tax.

Losing the ability to do future 1031 exchanges — it's a one-way move. OP units are also illiquid, and accessing liquidity by converting is a taxable event.

Held until death, OP units can receive a stepped-up basis that eliminates the deferred gain for heirs, and they divide among heirs far more easily than a single property.

A Qualified Opportunity Fund (QOF) lets an investor roll a capital gain into real estate or businesses in designated zones, deferring the tax now and eliminating tax on the fund's appreciation if held ten years.

Any capital gain — from real estate, stock, a business sale, or other assets — invested in a QOF within 180 days of the gain. This is the key difference from a 1031, which is real estate only.

Generally 180 days from the date the gain would be recognized, with special timing rules for pass-through and Section 1231 gains.

QOFs are securities generally offered to accredited investors. The underlying Opportunity Zone real estate, by contrast, can be bought and sold by anyone.

If you hold a QOF investment at least ten years, you can step up your basis to fair market value at sale, eliminating capital gains tax on the fund's appreciation.

No. It eliminates tax on the QOF investment's appreciation. The original deferred gain is recognized separately and earlier.

At the earlier of selling the QOF interest or the statutory inclusion date — December 31, 2026 under the original program. OZ 2.0 uses a rolling five-year deferral for investments made from 2027.

No. It only eliminates tax on gains that actually occur. If the fund underperforms, there's little appreciation to exclude — so the underlying deal matters most.

No. The 2025 One Big Beautiful Bill Act made the program permanent, with rolling zone designations and revised rules.

January 1, 2027. Governors nominate tracts beginning mid-2026, and once Treasury certifies them the new zones take effect; eligibility is tighter, so the map will likely be smaller.

Rural QOFs receive an enhanced 30% basis step-up (versus the standard 10%) and a halved substantial-improvement test under the 2025 law.

A QOF is the fund you invest your gain into; a QOZB is the operating business or project the fund invests in. Most deals use a two-tier QOF-into-QOZB structure for flexibility.

Treating the tax benefit as the reason to invest. The ten-year exclusion only helps if the project appreciates, so a weak deal can leave you locked in a decade for little benefit.

Roughly a decade — the headline benefit requires about a ten-year hold, and there's no reliable secondary market.

Form 8949 to elect deferral in the year of the gain, and Form 8997 annually while holding. The fund files Form 8996 to self-certify.

Use a 1031 for a real-estate gain you want to keep deferring indefinitely; use an OZ fund for a non-real-estate gain, or to pursue tax-free growth over ten years. An OZ fund also requires investing only the gain, not the full proceeds.

A real estate investment trust — a company that owns income-producing real estate and distributes most of its income to investors as dividends, generally paying no corporate-level tax.

Public REITs trade on exchanges with daily liquidity; non-traded REITs are SEC-registered but not listed, with limited redemptions; private REITs are Regulation D offerings open only to accredited investors.

A REIT offered under Regulation D, generally only to accredited and institutional investors. It's the least liquid and least transparent of the three types, with the highest minimums.

Minimums are typically higher than public or non-traded REITs — often in the tens of thousands of dollars — and require accredited-investor status.

A private REIT's stable price comes from appraisal-based valuation, not lower risk. The real-estate, leverage, liquidity, and sponsor risks remain — 'stable price' is not the same as 'safe.'

Through a redemption program, which typically has an initial lock-up, periodic windows, caps, and the sponsor's discretion to limit or suspend redemptions. Liquidity is real but conditional.

Mostly as ordinary income reported on Form 1099-DIV, with a 20% Section 199A deduction generally available on the qualified-REIT-dividend portion. Some distributions are capital-gain distributions or return of capital.

Often yes. REITs act as a UBTI blocker — their dividends generally aren't unrelated business taxable income to an IRA, unlike a leveraged operating partnership.

No. REIT shares are securities, not like-kind real estate. To reach a REIT with deferral, you 1031 into a DST and then 721 into the REIT.

A private REIT is a diversified portfolio company; a syndication is usually a single-deal partnership; a DST is a fractional interest in specific property that qualifies for a 1031 exchange. Only the DST is 1031-eligible.

Not necessarily. Their value just isn't marked to a public market daily, so it appears more stable. The underlying real-estate risk remains, plus illiquidity and less transparency.

A working interest pays operating costs and carries liability but earns the deductions and a share of revenue; a royalty interest receives cost-free revenue with no liability and no drilling deductions, though depletion applies.

Yes, if they come from a working interest. Under Section 469(c)(3), a working interest held in a form that doesn't limit liability isn't a passive activity, so its losses are active and can offset W-2 income.

Direct drilling programs (working interests) are securities sold to accredited investors. Mineral and royalty interests, by contrast, are treated as real property.

The non-salvageable costs of drilling a well — labor, fuel, chemicals, site prep. A working-interest owner can generally deduct them in the first year, often 70–85% of the investment.

Yes. Excess IDCs are an AMT preference item, so a large deduction can be partly clawed back for investors exposed to AMT, with limited relief for independent producers.

Independent producers and royalty owners can deduct generally 15% of gross income, subject to income limits — and it can continue even after basis is fully recovered. You take the greater of cost or percentage depletion each year.

Operating working-interest income is generally subject to self-employment tax; royalty income is not.

Generally yes. Mineral and royalty interests are treated as interests in real property, so they can be bought, sold, and 1031-exchanged with other real estate.

Yes. Direct oil and gas is speculative — a dry hole or failed program can be a total loss, and the tax deductions don't change that.

Dry-hole and geologic risk, commodity-price volatility, illiquidity, capital calls, operator quality, fraud, and AMT exposure. Underwrite the deal independent of the tax benefit.

On your gain — the sale price minus selling costs and your adjusted basis (cost plus improvements, minus depreciation taken). The gain is then taxed, with recapture and surtaxes layered on.

Federally, 0%, 15%, or 20% depending on income, for assets held more than a year. Short-term gains are taxed at ordinary rates.

An additional 3.8% on investment income, including real estate gains, above certain income thresholds (about $200,000 single / $250,000 joint). The thresholds aren't inflation-indexed.

Tax due at sale on the depreciation you claimed, at a federal rate of up to 25% — higher than the long-term capital gains rate. It applies whether or not you actually claimed the depreciation.

Through legal deferral and reduction strategies — a 1031 exchange (or DST), an Opportunity Zone fund, a 721 exchange, an installment sale, a charitable remainder trust, or holding until death for a stepped-up basis.

Sometimes. An Opportunity Zone fund can eliminate tax on the fund's appreciation after ten years, and holding until death gives heirs a stepped-up basis that can erase the deferred gain.

A sale that spreads your gain — and the tax — across the years you receive payments, rather than recognizing it all in the year of sale.

An irrevocable trust that can sell appreciated property without immediate capital gains tax, pay you income for life or a term, and leave the remainder to charity.

A person or entity meeting SEC standards — income over $200,000 individually ($300,000 jointly), net worth over $1 million excluding a primary residence, or certain credentials — eligible to buy private securities like DSTs.

A tax strategy that reclassifies building components into shorter depreciation lives (5, 7, or 15 years) to accelerate deductions, often paired with bonus depreciation. The trade-off is more recapture at sale.

A 1031 exchange defers recapture along with the capital gain; a DST does so passively; and holding until death can eliminate it via a stepped-up basis.