For CPAs, EAs and tax attorneys
You keep the tax opinion. We'll answer the structural question.
Your client wants to sell appreciated investment property and does not want to be a landlord again. Replacement property can be a passive interest — and under Rev. Rul. 2004-86 a beneficial interest in a Delaware statutory trust that meets the ruling's conditions is treated as an interest in the underlying real property. That is the part worth understanding before anyone talks to your client.
- No referral fees. We cannot pay them, and you should not be offered one.
- No tax advice to your client. If they ask us, we send them back to you.
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Ask the structural question
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This page is educational. It is not tax, legal or investment advice, it is not a tax opinion, and it does not apply any authority to any taxpayer. Citations are provided so you can read the primary source; confirm each against current law and your client's facts. Nothing here is an offer to sell or a solicitation of an offer to buy any security.
Key takeaways
- Rev. Rul. 2004-86 treats a beneficial interest in a Delaware statutory trust that meets the ruling's conditions as an interest in the trust's underlying real property, which is what allows it to be replacement property in a §1031 exchange.
- A DST interest is simultaneously a security, offered only by private placement memorandum to accredited investors through a broker-dealer. That dual character is the source of most of the confusion about them.
- The conditions in the ruling are restrictive by design: the trustee's powers are narrow, which is also why a DST cannot refinance, re-lease or reinvest its way out of a problem. Practitioners call these limits the seven deadly sins.
- The structural traps are the ordinary §1031 ones — constructive receipt, the 45 and 180 day clocks, replacing debt as well as equity, and boot — not anything peculiar to the DST wrapper.
- California property exchanged for out-of-state replacement property brings an annual FTB Form 3840 filing obligation with it, which outlives the exchange and lands on your desk, not ours.
- We do not pay referral fees and we do not render tax opinions. The tax position is yours.
Why most CPAs stop at "I'd be careful"
It is not skepticism about §1031. It is that the DST wrapper arrives through a salesperson, the compensation is invisible, the documents are long, and the downside of being wrong lands on the professional whose name is on the return. Telling the client to be careful is the rational response to being asked to endorse something you have not been allowed to inspect.
The fix is not reassurance. It is the documents, the citations, and a clear line about who owns which conclusion.
That line is below, and it does not move.
Who owns what
Yours
- Whether an exchange is advisable for this taxpayer at all.
- Basis, carryover and excess basis, and the replacement depreciation schedule.
- Boot, debt relief, and whether the exchange is fully or partially deferred.
- Entity and title questions — same taxpayer in, same taxpayer out.
- Form 8824, and FTB Form 3840 every year after.
- The tax opinion. All of it.
Ours
- What is structurally available as passive replacement property, and what is not.
- Whether the client meets the accredited-investor definition for a private placement.
- The PPM, the sponsor's disclosures, the fee schedule and the debt terms, sent to you unredacted.
- The non-recourse debt figure your client's share carries, so you can test debt replacement.
- Deadline logistics with the qualified intermediary.
- Suitability on the securities side, which is our obligation and not a tax conclusion.
We do not render tax opinions and we do not want to. A deal that only works if the CPA is kept at arm's length is a deal that should not happen.
The authorities, in one place
Cited, not interpreted. These are the provisions that actually govern the structure, so you can go to the source rather than take a summary from a website.
| Question | Authority | What it goes to |
|---|---|---|
| Like-kind exchange, real property only | IRC §1031(a) | Limited to real property held for productive use in a trade or business or for investment for exchanges after 2017. |
| Identification and exchange periods | IRC §1031(a)(3) | 45 days to identify; the earlier of 180 days or the due date of the return for the year of transfer to close. Missing either recognizes the gain. |
| Qualified intermediary safe harbor | Treas. Reg. §1.1031(k)-1(g)(4) | The mechanism that avoids actual or constructive receipt. It has to be in place before the relinquished property closes. |
| DST interest as real property | Rev. Rul. 2004-86 | A beneficial interest in a Delaware statutory trust meeting the stated conditions is treated as an interest in the underlying real property; the trust is an investment trust under Treas. Reg. §301.7701-4(c), not a business entity. |
| Depreciation of replacement property | Treas. Reg. §1.168(i)-6 | Carryover basis and the excess-basis split, which is where the replacement property's depreciation schedule comes from. |
| Unrecaptured §1250 gain | IRC §1(h)(1)(E) | Deferred along with the rest of the gain in a fully deferred exchange, and taxed at a rate up to 25% when recognized. |
| California annual reporting | Cal. R&TC §18032, FTB Form 3840 | Required when California property is exchanged for property outside California, filed annually until the deferred gain is recognized or otherwise eliminated. |
| 721 / UPREIT contribution | IRC §721 | Relevant when a DST's property is later contributed to a REIT's operating partnership. A different section with different consequences, including loss of future §1031 eligibility. |
Tax law changes and these citations are current as of October 2, 2026 only. Verify against current law before relying on any of them.
Where these actually go wrong
In practice the failures are almost never exotic. They are the ordinary §1031 failures, plus two that belong to the wrapper rather than the exchange.
Constructive receipt
The one that cannot be repaired. If the client has the right to receive, pledge, borrow against or otherwise benefit from the proceeds, the exchange fails. The qualified intermediary agreement has to be signed before the relinquished property closes, not after.
Debt, not just equity
Replacing equity alone leaves debt relief as boot. A DST interest carries the investor's share of the trust's non-recourse debt, which is one reason the structure is used in this context, but the arithmetic still has to be done against the actual figures in the PPM rather than assumed.
Identification mechanics
Identification is in writing, to the intermediary or another permitted party, within 45 days, and it has to describe the property unambiguously. For a DST that means the specific trust and the percentage interest, not a sponsor's name.
Same taxpayer
The taxpayer that sells must be the taxpayer that buys. Entity changes mid-exchange, a death, a divorce, or a partnership that wants to split directions are the situations that need your attention well before the closing date, not during the 45 days.
Illiquidity is the real cost
A DST interest has no public market and typically no redemption right. The holding period is the sponsor's, not the investor's. A client who may need the capital has a liquidity problem the tax deferral does not solve, and can lose some or all of the investment.
Fees reduce what is left
Offering costs, acquisition fees, asset management fees and disposition fees all come out of investor capital and returns. They are disclosed in the PPM and they are not small. Read them before the client does.
The clock your client is probably already on
A qualified intermediary must be engaged before the relinquished property closes, and the proceeds must never reach the taxpayer. From that closing there are 45 days to identify replacement property in writing and 180 days — or the due date of that year's return, whichever is earlier — to complete the acquisition. A client who calls on day 38 has a narrower set of options than a client who calls before listing, and a client who has already received the money has none under §1031.
The 45 and 180 day deadlines → Qualified intermediary role → How a DST is structured →
Further reading on this site
- DST pros and cons — the case against, stated plainly.
- DST vs TIC — why co-tenancy structures largely gave way to DSTs.
- 721 exchange and UPREIT — the common DST exit, and what it costs in future flexibility.
- California 1031 rules — including the FTB Form 3840 reporting obligation.
- Accredited investor definition — the gate on any private placement.
- Other capital gains approaches — for the client who cannot use an exchange.
Who you will talk to
The bottom line
A 1031 exchange may defer the gain on investment real property if the deadlines are met and the taxpayer never takes receipt of the proceeds, and Rev. Rul. 2004-86 is what makes a passive DST interest available as replacement property for a client who will not buy another building. It is illiquid, it is speculative, the fees are real, and an investor can lose some or all of what they put in. None of that is a tax conclusion, and none of it is yours to take on our word. Send the question and read the documents yourself.
Prefer to talk it through? Book a call with Toni.
Questions tax professionals ask
Do you pay referral fees to CPAs?
No. Compensation for securities business can only be paid to a person registered to receive it, so there is no referral fee, finder's fee or revenue share available here. There is also no version of this where your client is told you were paid, because you were not.
Is a DST interest real property or a security?
Both, for different purposes. For §1031 purposes, Rev. Rul. 2004-86 treats a beneficial interest in a Delaware statutory trust meeting the ruling's conditions as an interest in the underlying real property. For securities law purposes it is a security, sold by private placement memorandum under Regulation D to accredited investors through a broker-dealer. Each characterization governs its own body of law.
Why can't a DST refinance or re-lease?
Because the conditions in Rev. Rul. 2004-86 keep the trustee's powers narrow enough that the trust is an investment trust rather than a business entity. The practical effect is that the trustee generally cannot renegotiate or enter new leases, refinance or borrow new money, reinvest sale proceeds, make more than minor non-structural improvements, or take additional capital contributions. The restriction is what makes the §1031 treatment available, and it is also the structure's main operational weakness.
Will you give my client tax advice?
No. We will not tell your client what their tax result is, and if they ask, we will tell them to ask you. We will give you the documents and the figures you need to reach your own conclusion.
What do you actually send me?
The private placement memorandum in full, the fee schedule, the debt terms including the client's share of non-recourse debt, and the closing documents. Nothing redacted and nothing summarized in place of the original.
My client already closed on the sale and took the proceeds. Anything left?
Not a §1031 exchange — once the taxpayer has received the proceeds that door is closed. Other approaches have their own requirements and deadlines and are not substitutes for an exchange. That is a conversation worth having quickly rather than at the filing deadline.
For educational purposes only. Nothing on this page is tax, legal or investment advice, a tax opinion, an offer to sell or a solicitation of an offer to buy any security, or a recommendation to any investor. Code and regulation citations are provided for reference, are current as of October 2, 2026 only, are not applied to any taxpayer's facts, and must be verified against current law. No specific outcome, tax deferral or tax saving is promised. A 1031 exchange is subject to strict requirements and deadlines; a failed exchange results in the gain being recognized. All real estate investments can lose value, and all investments carry the risk of loss of some or all of the principal invested. DST interests are offered only by private placement memorandum to accredited investors. They are speculative and illiquid, distributions are not guaranteed, fees reduce returns, and investors can lose some or all of their investment.