1031 Exchange & DST — Frequently Asked Questions
Plain-English answers to the most common questions about 1031 exchanges, Delaware Statutory Trusts, and deferring capital gains tax on investment real estate. This is general educational information, not tax, legal, or investment advice — always consult your own professionals.
1031 exchange basics
What is a 1031 exchange?
A 1031 exchange lets an investor sell investment or business real estate and defer federal and state capital gains taxes by reinvesting the proceeds into like-kind replacement property, following the rules and deadlines in Section 1031 of the Internal Revenue Code.
How does a 1031 exchange work?
You sell the relinquished property, the proceeds go to a qualified intermediary instead of to you, you identify replacement property within 45 days, and you close within 180 days. Because you never take receipt of the cash and reinvest in like-kind property, the capital gains tax is deferred.
What property qualifies as like-kind?
For real estate, like-kind is interpreted broadly: almost any real property held for investment or business use can be exchanged for almost any other. An apartment building can be exchanged for raw land, retail, or a DST interest. Property held for personal use or resale does not qualify.
Can I do a 1031 exchange on my primary residence?
No. Section 1031 applies only to property held for investment or productive use in a trade or business, so a primary residence does not qualify. A separate provision, Section 121, may exclude some gain on the sale of a main home.
How much does a 1031 exchange cost?
Costs vary but typically include qualified intermediary fees — often several hundred to a couple thousand dollars — plus normal closing and advisory costs. These are usually small relative to the capital gains tax being deferred.
Deadlines & identification rules
What is the 45-day rule?
After selling your relinquished property you have 45 calendar days to identify potential replacement properties in writing to your qualified intermediary. The deadline is strict and is not extended for weekends or holidays.
What is the 180-day rule?
You must close on your replacement property within 180 calendar days of selling the relinquished property, or by your tax-return due date if that is earlier. The 45-day and 180-day clocks run concurrently from the sale closing date.
What are the 3-property, 200%, and 95% identification rules?
You can identify up to three properties of any value (the 3-property rule); or any number of properties as long as their combined value does not exceed 200% of what you sold (the 200% rule); or any number of any value if you acquire at least 95% of the total value identified (the 95% rule).
What happens if I miss the 45-day or 180-day deadline?
If you miss either deadline the exchange generally fails and the sale becomes a taxable event, so the deferred capital gains tax becomes due. Because the deadlines are strict, identification and closing must be planned carefully in advance.
Do I need a qualified intermediary for a 1031 exchange?
Yes, for a standard delayed exchange. A qualified intermediary is an independent party that holds the sale proceeds and facilitates the exchange so you never take receipt of the funds. Taking receipt of the proceeds yourself disqualifies the exchange.
What is boot in a 1031 exchange?
Boot is any non-like-kind value you receive in an exchange, such as leftover cash or a reduction in debt (mortgage boot). Boot is taxable to the extent of your gain, so fully deferring tax generally requires reinvesting all proceeds and replacing all debt.
What is depreciation recapture?
Depreciation recapture is the portion of your gain attributable to depreciation deductions you previously claimed, which can be taxed at a higher rate than long-term capital gains. A 1031 exchange defers depreciation recapture along with the capital gains tax.
Delaware Statutory Trusts (DSTs)
Can you 1031 exchange into a DST?
Yes. Under IRS Revenue Ruling 2004-86 a beneficial interest in a Delaware Statutory Trust is treated as a direct interest in real estate, so it qualifies as like-kind replacement property in a 1031 exchange when all other requirements are met.
What is the minimum investment for a DST?
DST minimums are typically lower than buying a whole property because interests are fractional — often in the range of $25,000 to $100,000 depending on the offering. The exact minimum and terms are set in each offering's private placement memorandum.
What is a 721 exchange or UPREIT?
A 721 exchange, or UPREIT, lets an investor contribute real estate — including some DST interests — into a REIT's operating partnership in exchange for partnership units, deferring gain. Once converted, the investor generally can no longer complete a future 1031 exchange on that interest.
What is the difference between a DST and a REIT?
A DST holds specific, identified real estate and its interests are 1031-eligible, so investors can defer capital gains. A public REIT is a company whose shares are liquid but not eligible for a 1031 exchange. DSTs trade liquidity for tax deferral and direct real-estate treatment.
What happens when a DST sells its property?
When the trustee sells the underlying property, investors receive their pro rata share of the proceeds and can either recognize the gain or roll the proceeds into another 1031 exchange, including another DST, to continue deferring the tax.
Deferring capital gains tax
How can I avoid capital gains tax on real estate?
Common ways to defer capital gains tax on investment real estate include a 1031 like-kind exchange and investing in a Delaware Statutory Trust. A 1031 exchange defers the tax as long as you keep exchanging, and heirs may receive a step-up in basis. Always consult a tax professional for your situation.
Do you ever pay tax on a 1031 exchange?
Tax is deferred, not erased — it comes due if you eventually sell without exchanging again. Investors who keep exchanging (sometimes called swap till you drop) can defer indefinitely, and heirs may receive a stepped-up cost basis at death, which can eliminate the deferred gain.
Investing for income, safety & risk
Are DST or real estate investment returns guaranteed?
No. DST interests and other real estate securities are investments, not guaranteed products — distributions can rise, fall, or stop entirely, and you can lose principal. Any projected yield is an estimate, not a promise, and past performance does not indicate future results. Always review an offering's risk factors before investing.
What is the safest way to invest in real estate?
No real estate investment is risk-free. Investors seeking lower-volatility, income-oriented exposure often look at diversified, professionally managed real estate such as Delaware Statutory Trusts, which can spread risk across property types, tenants, and locations. All real estate still carries market, tenant, and liquidity risk, so diversification and professional advice matter more than any single choice.
How can I invest for reliable passive income?
Income-oriented investments such as rental real estate and DST interests aim to produce regular distributions from rents, but that income is not guaranteed and varies with occupancy and market conditions. Passive structures like DSTs can pay potential monthly or quarterly distributions without you managing property directly, while you still bear the underlying investment risk.
How can I get passive income from real estate without being a landlord?
Fractional, professionally managed structures such as Delaware Statutory Trusts let you own a beneficial interest in real estate and receive pro rata distributions without handling tenants, repairs, or day-to-day management. In exchange you give up direct control and easy liquidity, and returns are not guaranteed.
How do I invest a large sum after selling a property?
Investors selling appreciated real estate often use a 1031 exchange to defer capital gains tax by reinvesting the proceeds into like-kind property, including DST interests. Deferring the tax can keep more capital working for potential income, but every option carries its own risks and strict deadlines, so consult your tax and financial professionals before acting.
Is real estate a good investment for retirement income?
Many investors use income-producing real estate for potential retirement cash flow because it can generate regular distributions and offer tax advantages. However, real estate is illiquid and its returns vary, so it is generally used as one part of a diversified plan rather than a guaranteed income source. Consult a financial professional about your situation.
What is a trust in investing?
In investing, a trust is a legal entity that holds assets for the benefit of its investors or beneficiaries. In real estate, a Delaware Statutory Trust (DST) holds title to income-producing property and passes rental income and sale proceeds through to investors, who own fractional beneficial interests rather than deeded title.
What is a statutory trust?
A statutory trust is a business trust formed under a specific state statute — most commonly Delaware's Statutory Trust Act of 1988 — that is recognized as its own legal entity separate from its trustees. In real estate investing, a Delaware Statutory Trust (DST) uses this structure to let multiple investors co-own institutional-quality property and treat it as a direct interest in real estate for 1031 purposes.