Master your 1031 exchange before you act
Independent, plain-English education across every option — DSTs, 721 UPREITs, opportunity zones, net-lease, property types, and state-by-state rules.
1031 Basics
The Complete Guide to a 1031 Exchange
Selling an investment property can trigger a painful tax bill on every dollar of gain you've built up. A Section 1031 exchange lets you defer that tax by reinvesting the proceeds into another like-kind property instead of pocketing the cash. Done right, you keep more equity working for you and roll your basis forward. This guide walks through who qualifies, the strict deadlines, the people involved, and the common mistakes that can blow the whole thing up.
The 45-Day and 180-Day Deadlines Explained
More 1031 exchanges fail on timing than on anything else. The moment your sale closes, two clocks start ticking — and the IRS does not grant extensions for a hot market, a slow lender, or a deal that fell through. Understanding exactly when each window starts, how they overlap, and how the property identification rules work is what separates a clean deferral from a surprise tax bill. Here's how the timeline really works.
What Is a Qualified Intermediary (and why you need one)
There's one rule that quietly trips up first-time exchangers: you are never allowed to touch the money from your sale. The instant proceeds land in your account, the IRS calls it a taxable sale and your exchange is over. The fix is a Qualified Intermediary — a neutral middleman who holds the cash and stitches the two transactions together. Here's what a QI does, who's disqualified from being one, and how to pick a safe one.
Reverse 1031 Exchange: How It Works
Sometimes the perfect replacement property appears before you've sold the one you own — and you can't risk losing it. A reverse 1031 exchange flips the usual order: you acquire the new property first, then sell the old one, while still deferring your capital gains tax. It's more complex and more expensive than a standard exchange, because the IRS won't let you own both properties at once. Here's how the 'parking' structure works and when it's worth it.
Partial 1031 Exchanges and "Boot" Explained
Not every investor wants to reinvest every last dollar. Maybe you need some cash, or the replacement property simply costs less than what you sold. That's allowed — but the portion you don't reinvest becomes taxable. In 1031 language, it's called 'boot.' Understanding the two kinds of boot, how each is taxed, and how to avoid creating it by accident can save you a meaningful chunk of your gain. Here's how it works.
Capital Gains Tax & Depreciation Recapture on a Property Sale
When you sell an investment property, the IRS wants a cut of more than just your profit. Beyond capital gains tax, there's depreciation recapture — a charge on all the deductions you took over the years — plus a possible surtax for higher earners. Stacked together, these can claim a surprisingly large slice of your sale. Understanding each layer shows you exactly what's at stake, and exactly what a 1031 exchange lets you defer. Here's the full breakdown.
Can You Do a 1031 Exchange Across State Lines?
One of the most common questions investors ask is whether a 1031 exchange has to stay inside one state. The short answer is no — you can sell in one state and buy in another, and the federal deferral still applies. But states have their own rules, and a few will eventually want their share of the deferred gain through what's called a 'clawback.' Here's how interstate exchanges work and the state-level traps to plan around.
DST Investing
What Is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust, or DST, is a legal entity that holds title to real estate and lets many investors each own a fractional beneficial interest. For 1031 exchange investors, a DST offers a way to defer capital gains while stepping out of active management. The IRS treats a properly structured DST interest as like-kind real property, so it can serve as replacement property. This guide explains how DSTs work and who they suit.
DST Pros and Cons for 1031 Investors
Delaware Statutory Trusts can solve real problems for 1031 exchange investors, from beating tight deadlines to retiring from active management. But the same features that make DSTs convenient also bring trade-offs: you give up control, accept illiquidity, and pay sponsor fees. This guide lays out the main pros and cons so you can judge whether a DST fits your goals, then review the specifics with your CPA and attorney.
The "Seven Deadly Sins" of DSTs
The "seven deadly sins" are a set of restrictions on what a Delaware Statutory Trust trustee may do once the offering closes. They come from IRS guidance, including Revenue Ruling 2004-86, and exist to keep the DST passive enough to qualify as 1031 like-kind real property. Understanding these limits explains both why DSTs are so passive and what risks the structure cannot easily fix. Here is what each restriction means.
Why DSTs Can Close in Days
The 1031 exchange clock is strict: 45 days to identify replacement property and 180 days to close. When a direct purchase stalls or collapses, investors can lose the entire tax deferral. Delaware Statutory Trusts solve this because they are pre-packaged offerings that can often close in just a few days. This guide explains why DSTs move so fast and how investors use them as a backup to protect a tight exchange.
Investment Vehicles
721 Exchange / UPREIT: Trade Real Estate for REIT Shares
A 721 exchange, often called an UPREIT, lets a property owner contribute real estate, or a DST interest, into a real estate investment trust's operating partnership in return for partnership units. Under Section 721, that contribution defers capital gains, much like a 1031. But it converts hard real estate into a securities position and generally ends future 1031 eligibility. This guide explains the mechanics, the benefits, and the one-way nature of the move.
Tenants-in-Common (TIC) 1031 Investments
Tenants-in-common, or TIC, ownership lets multiple investors each hold a direct, deeded fractional interest in the same property. Each co-owner holds title to an undivided percentage and can use that interest in a 1031 exchange. TICs were the original co-ownership vehicle for fractional 1031 deals before DSTs became dominant. They still appear in certain transactions, especially where investors want direct title or financing flexibility. This guide explains how TICs work and their trade-offs.
Qualified Opportunity Zones Explained
Qualified Opportunity Zones, or QOZs, are a federal incentive created to channel capital gains into designated low-income communities. By investing eligible gains into a Qualified Opportunity Fund, an investor can defer those gains until the 2026 tax year and, if the investment is held long enough, earn tax-free appreciation on the new investment. QOZs are often compared to 1031 exchanges, but they work differently. This guide explains the core mechanics and trade-offs.
Triple-Net (NNN) Properties Explained
A triple-net, or NNN, lease is a structure in which the tenant, not the landlord, pays the property taxes, insurance, and maintenance in addition to base rent. That arrangement shifts most operating responsibilities to the tenant and gives the owner relatively predictable, passive income. NNN properties, often single-tenant retail or commercial buildings, are popular 1031 exchange replacement assets. This guide explains how triple-net leases work, why exchange investors favor them, and what risks remain.
Compare Options
DST vs. REIT: Which Is Right for Your 1031?
Investors selling appreciated real estate often weigh a Delaware Statutory Trust (DST) against a real estate investment trust (REIT). They sound interchangeable, but they behave very differently inside a 1031 exchange. A DST holds a fractional, deeded-style interest in real property that the IRS treats as like-kind replacement property. A publicly traded REIT share is a security — liquid, but not directly 1031-eligible. Understanding that distinction is the first step in choosing the right structure for your goals.
DST vs. Opportunity Zone Fund
When you have a large capital gain, two popular strategies often come up: rolling into a Delaware Statutory Trust (DST) through a 1031 exchange, or investing the gain into a Qualified Opportunity Zone (QOZ) fund. Both can reduce a current tax bill, but they work in fundamentally different ways. A DST defers the entire gain through like-kind treatment; a QOZ fund defers only the reinvested gain and rewards a long hold with potentially tax-free appreciation. The right choice depends on what you are trying to optimize.
1031 Exchange vs. 721 UPREIT Exchange
Section 1031 and Section 721 both let real estate owners defer capital gains, but they lead to very different destinations. A 1031 exchange keeps you in directly held (or DST) real estate that you can exchange again and again. A 721 UPREIT exchange contributes your property into a REIT's operating partnership in return for partnership units. That can deliver diversification and eventual liquidity — but it is essentially a one-way door out of the 1031 world.
DST vs. Buying a Replacement Property Yourself
After selling an investment property, every 1031 investor faces the same fork: buy and manage a replacement property yourself, or place the proceeds into a passive Delaware Statutory Trust (DST). Both defer your gain. The difference is how much control, work, and deadline pressure you take on. Direct ownership gives you full command of the asset but puts the clock — and the management — squarely on your shoulders. A DST hands the work to a sponsor in exchange for giving up day-to-day control.
DST vs. TIC (Tenants-in-Common)
Before the DST became the dominant passive 1031 vehicle, Tenants-in-Common (TIC) structures filled that role. Both let multiple investors co-own institutional real estate as 1031 replacement property, but they govern that ownership very differently. A TIC gives each investor a direct deeded interest and a vote; a DST holds the property under a single trustee while investors hold beneficial interests. That governance gap drives most of the practical differences investors notice.
Property Types
Multifamily DST Properties for 1031 Exchanges
Multifamily — apartment communities, garden-style complexes, and mid-rise rentals — is one of the most familiar asset classes for 1031 investors who want to stay invested in real estate without managing tenants themselves. Many owners selling a small rental building exchange into a professionally managed multifamily Delaware Statutory Trust (DST) to defer capital gains, diversify across multiple units and markets, and move from active landlording to a passive ownership position. All figures here are illustrative and not guaranteed.
Self-Storage DST Properties
Self-storage has grown from a niche into a mainstream asset class that many 1031 investors consider for passive replacement property. Storage facilities tend to have low operating intensity, month-to-month leases, and demand driven by life events like moving, downsizing, and small-business overflow. Exchangers attracted to relatively lean operations and pricing flexibility sometimes use a self-storage Delaware Statutory Trust (DST) to defer capital gains while stepping back from hands-on management. All figures here are illustrative and not guaranteed.
Industrial & Logistics DST Properties
Industrial and logistics real estate — warehouses, distribution centers, and last-mile fulfillment buildings — has become a favored asset class as e-commerce and supply-chain reshoring drive demand for space. For 1031 investors, an industrial Delaware Statutory Trust (DST) offers exposure to long-leased, often credit-tenant buildings with relatively simple operations, while deferring capital gains and shedding active management. Leases are frequently long and net in structure. All property examples and figures here are illustrative and not guaranteed.
Medical Office DST Properties
Medical office buildings (MOBs) — outpatient clinics, physician suites, and ambulatory care centers — appeal to 1031 investors seeking a defensive, demographically supported asset class. Healthcare tenants tend to invest heavily in their space, sign longer leases, and renew at high rates, which can translate into stable occupancy. A medical office Delaware Statutory Trust (DST) lets exchangers defer capital gains and own professionally managed healthcare real estate passively. All property examples and figures here are illustrative and not guaranteed.
Net-Lease Retail (NNN) Properties
Net-lease retail — single-tenant pharmacies, quick-service restaurants, convenience stores, and freestanding shops on triple-net (NNN) leases — is a classic landing spot for 1031 investors who want hands-off income. Under a true NNN lease, the tenant covers taxes, insurance, and maintenance, leaving the landlord with relatively passive rent collection. A net-lease retail Delaware Statutory Trust (DST) can spread an exchange across multiple tenants and locations while deferring capital gains. All property examples and figures here are illustrative and not guaranteed.
Student Housing DST Properties
Purpose-built student housing near major universities is a specialized residential asset class that some 1031 investors use for passive, demand-driven income. Enrollment at large schools tends to be steady, and per-bed leasing with parental guarantees can produce strong occupancy. A student housing Delaware Statutory Trust (DST) lets exchangers defer capital gains and own professionally managed, institutional-grade properties without handling the intensive turnover themselves. All property examples and figures here are illustrative and not guaranteed.
Senior Housing DST Properties
Senior housing — independent living, assisted living, and memory care — is a demographically driven asset class that some 1031 investors consider for long-term, needs-based demand. An aging population supports the sector, though operations are more service-intensive than traditional real estate. A senior housing Delaware Statutory Trust (DST) lets exchangers defer capital gains and own professionally operated communities passively, leaving care and management to specialists. All property examples and figures here are illustrative and not guaranteed.
1031 by State
1031 Exchange in California
California carries one of the heaviest tax loads on real estate gains in the country, with a top marginal rate of roughly 13.3% layered on top of federal capital-gains and depreciation-recapture tax. For owners of appreciated rentals, a fully deferred 1031 exchange can mean keeping six figures working in the next property instead of writing a check to two governments. Delaware Statutory Trusts (DSTs) make that deferral practical for owners ready to step away from active management.
1031 Exchange in New York
New York combines a high top income-tax rate of roughly 10.9% on gains with aggressive enforcement, so the cost of a taxable sale here is steep — and the margin for a sloppy exchange is thin. Owners of appreciated New York real estate increasingly use 1031 exchanges, and Delaware Statutory Trusts (DSTs) in particular, to defer federal and state tax while moving out of hands-on management into professionally run, diversified real estate.
1031 Exchange in New Jersey
New Jersey pairs a high top income-tax rate with a withholding mechanism — commonly called the nonresident exit tax — that captures estimated tax right at closing. For owners selling appreciated New Jersey real estate, especially those moving out of state, that can mean a meaningful chunk withheld up front. A 1031 exchange, often into a Delaware Statutory Trust (DST), lets owners defer federal and state tax and sidestep the cash drain of a fully taxable sale.
1031 Exchange in Oregon
Oregon has no general sales tax, but it makes up for it with one of the higher state income-tax rates in the country — roughly 9.9% at the top — and that rate applies to capital gains. For owners of appreciated Oregon real estate, a fully taxable sale stacks that 9.9% on top of federal tax. A 1031 exchange, often into a Delaware Statutory Trust (DST), lets Oregon owners defer both layers while moving into passive, professionally managed real estate.
1031 Exchange in Minnesota
Minnesota imposes a high state income tax that reaches roughly 9.85% at the top, and it applies to capital gains from a property sale. For owners of appreciated Minnesota real estate, that state rate stacks directly on top of federal capital-gains and depreciation-recapture tax. A 1031 exchange — frequently into a Delaware Statutory Trust (DST) — lets Minnesota owners defer both layers of tax while transitioning out of hands-on ownership into passive, professionally managed real estate.
1031 Exchange in Hawaii
Hawaii has both a high top income-tax rate of roughly 11% on gains and HARPTA — a withholding regime that captures a percentage of the sales price from nonresident sellers at closing. For owners of appreciated Hawaii real estate, especially mainland-based investors, a taxable sale can mean a sizable amount withheld up front plus a heavy combined tax bill. A 1031 exchange, often into a Delaware Statutory Trust (DST), lets owners defer federal and state tax and avoid that cash drain.
1031 Exchange in Massachusetts
Massachusetts applies a flat state income tax of around 5% to most income, but a millionaire surtax adds roughly 4% on income above the high-dollar threshold — and a large property sale can push a taxpayer over that line in a single year. For owners of appreciated Massachusetts real estate, that surtax can meaningfully raise the cost of a taxable sale. A 1031 exchange, often into a Delaware Statutory Trust (DST), lets owners defer federal and state tax and avoid spiking into surtax territory.
1031 Exchange in Texas
Texas has no state income tax, so capital gains on a Texas property sale escape state-level tax entirely — but federal capital-gains tax, depreciation recapture, and the net investment income tax still apply. That makes Texas a frequent destination for investors relocating or retiring from high-tax states, and a 1031 exchange remains valuable here for deferring the federal layer. Delaware Statutory Trusts (DSTs) let Texas owners and newcomers defer federal tax while moving into passive, professionally managed real estate.
Your Situation
How to Retire From Being a Landlord
You've spent years answering 2 a.m. calls, chasing late rent, and patching roofs. The equity is real, but so is the burnout. Selling outright could hand a large slice of your gain to the IRS through capital gains and depreciation recapture. A 1031 exchange lets you trade the headaches for potentially passive ownership without triggering that tax today. Here's how landlords step back from day-to-day management while keeping their equity working.
1031 Exchanges, Estate Planning & the Step-Up in Basis
You've built real estate wealth and you're thinking about what you'll leave behind. Capital gains tax can feel like a wall between you and a clean handoff to your heirs. But the tax code offers a powerful pairing: defer gains during life with 1031 exchanges, then let the step-up in basis at death potentially reset that built-in gain for your heirs. Understanding how these two rules work together can reshape your entire estate plan.
"Swap Till You Drop": Deferring Gains for Life
"Swap till you drop" isn't a loophole; it's a strategy built into the tax code. The idea: keep exchanging appreciated real estate under Section 1031 throughout your life, never paying the deferred capital gains tax, then pass the property to heirs who receive a step-up in basis at death. Done right, decades of deferred gain can be largely erased. Here's how investors think about deferring for life.
Using a DST as a Backup to Save a Failing Exchange
Your replacement deal just fell apart and the 45-day identification clock is ticking. Without a qualifying property identified in time, your entire 1031 exchange collapses and the full capital gains tax comes due. This is exactly the scenario a DST backup is built for. Because Delaware Statutory Trusts are pre-packaged and close fast, savvy investors and intermediaries name one as a safety net before the deadline expires.
Replacing Debt to Avoid "Mortgage Boot"
You sold a leveraged property and reinvested every dollar of equity, so you assumed your 1031 exchange was fully tax-deferred. Then your CPA mentions "mortgage boot." If your replacement property carries less debt than what you paid off, the IRS can treat that reduction as taxable, even when you reinvested all your cash. Understanding mortgage boot, and how to replace debt, can save you from an unexpected tax bill.
Selling an Inherited or Jointly-Owned Property With a 1031
You've inherited real estate, perhaps with siblings, and you're weighing whether to sell. Before reaching for a 1031 exchange, understand a crucial nuance: inherited property usually receives a step-up in basis at death, so a sale soon after may carry little or no taxable gain. A 1031 isn't always needed. But for jointly-owned property, appreciated holdings, or co-owners who want different outcomes, the picture gets more interesting.
Ready to put it into action?
Get matched to illustrative options for your situation and talk to a licensed specialist — free and with no obligation.