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1031 Exchange Questions

Frequently asked questions about 1031 Exchanges and Delaware Statutory Trusts

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Can anyone invest in DST?

No! A Delaware Statutory Trust investment product is for accredited investors only.

What is an "Accredited Investor”?

Accredited is defined as:

Individuals (i.e., natural persons) may qualify as accredited investors based on one of the following criteria:

  • Net worth (assets - liabilities=Net Worth) over $1 million, excluding primary residence (individually or with spouse or partner)
  • Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year

Entities are considered as accredited investors with assets of $5 Million or more.

How long are DSTs held?

DSTs are held for anywhere between 3 – 10 years. Should investors want to exchange out of the property, conservatively, the DST property should be held for a minimum of two years. Typically, the DST loan’s prepayment penalties become palatable after year 3. DSTs with debt in place are not allowed to refinance, as such with 10-year fixed rate commercial debt, 10 years becomes the maximum hold period.

Can I sell my DSTs at any time?

Should you be interested in selling your position in a DST, there is a mechanism to do so. However, it cannot be guaranteed that you will be able to sell the DST investment, nor receive your entire investment back unless the market conditions support it.

Are DSTs returns guaranteed?

DST ownership is very much direct ownership of investment real estate. Therefore, returns are not guaranteed. There are certain offerings that focus on the predictability of potential income, such as net lease offerings, due to the duration of the lease and the fact that the leases are corporate guaranteed. However, DSTs returns are never completely guaranteed.

What happens after a DST property sells?

Once a DST property sells, all DST investors will receive their pro-rata share of the sales proceeds consistent with their initial investment, including any potential appreciation. At that time, investors will have the option of either exchanging into more DSTs, exchanging into any other investment property, paying tax, or a combination thereof.

Top 10 Misconceptions

1. “Like-kind” means I must exchange the same type of property, such as an apartment building, for another apartment building.


To qualify for a 1031 exchange, both the relinquished and replacement properties must be “held for productive use in a trade or business or for investment” and be “like-kind.” However, the definition of like kind is broader than you may think. Under IRS 1031 exchange rules, properties must be of “the same nature, character, or class” but the “quality or grade” does not matter. Essentially, most real property in the U.S. is like-kind to other real property in the U.S. This means, for example, that you could exchange acres of farmland for an apartment building, an industrial park for a retail store, or a hotel for a restaurant. However, it’s important to note that some properties do not qualify. Personal property such as a primary residence or a vacation home not used as a rental property does not qualify.

2. A 1031 Exchange means that the sale and the purchase have to happen at the same time. In other words, the seller has to find someone willing to swap properties.


An exchange is rarely a swap of properties between two parties. Most exchanges involve multiple parties: the Exchanger, the buyer of the Exchanger’s old (Relinquished) property, the seller of the Exchanger’s new (Replacement) property, and a Qualified Intermediary.

3. My attorney or CPA can handle the exchange for me as my Qualified Intermediary.


If the seller’s attorney or accountant has provided any legal or accounting related services (or any service not exchange-related) in the two-year period before the exchange, they are disqualified and may not act as the Qualified Intermediary. Your use of them to facilitate an exchange will disqualify your transaction because they are considered your agent.

4. To do a 1031 Exchange I just need to file a form with the IRS with my tax return and “roll over” the proceeds into a new investment.


A valid exchange requires much more than just reporting the transaction on Form 8824. One of the biggest missteps when structuring an exchange is allowing the taxpayer to have actual or constructive receipt of their sale proceeds. This triggers a taxable event. An independent third party (a Qualified Intermediary) must hold the sale proceeds during the course of the exchange. There are also specific 1031 Exchange regulations and deadlines that must be adhered to as well.

5. I can only defer my capital gains tax via a 1031 Exchange.


Besides capital gains taxes, you can also defer the depreciation recapture tax, the Net Investment Income tax and State taxes (if applicable). Therefore, if you do not exchange and elect to pay taxes, you may have an effective or blended capital gains rate as high as 35% to 40%.

6. All of the funds from the sale of the relinquished property must be reinvested.

Not Necessarily

A taxpayer or exchanger can buy down in value. Or a taxpayer can choose to withhold funds or

receive other non-like-kind property in an exchange. But the amount that they buy down, or

money they withhold, or any other non-like-kind property received, is considered “boot” which

means the exchanger likely will have to pay some taxes.

7. You must replace the debt that you had on the relinquished property with at least the same amount of debt on the replacement property.


The exchanger can always bring their own cash (from outside of the 1031 Exchange) to the closing table for the replacement property to offset any reduction in debt. You need to replace the value of the debt paid off on the relinquished property.

8. Opportunity Zone Funds are another alternative to defer my taxes.


Bear in mind, the tax deferral on your capital gains invested in these funds will expire at the end of 2026. Then it will be time to pay the IRS. With a 1031 Exchange you can defer paying taxes on those gains until your death as well as providing your heirs with a “stepped up basis” in the inherited property in addition to other tax benefits not available with investments in Opportunity

Zone Funds.

9. When I sell my personal residence, I need to set it up as a 1031 Exchange.


Tax-deferred exchanges cannot be used for real property held only for personal use. The good news is Section 121 of the tax code allows you to sell your home and avoid capital gain tax up to a certain amount. If you own an apartment building and are using one of the units as your personal residence, you may need to utilize Sections 1031 and 121 for maximum tax deferral/savings by applying the guidance provided by Revenue Procedure 2008-16.

10. If I sell property, I can only exchange into one property.


Per 1031 Exchange rules, you can sell one property and exchange into multiple replacement properties. In addition, you can sell multiple properties and exchange into one larger and more easily managed property