Strategy

1031 Exchanges

Defer capital gains tax by exchanging investment property into like-kind real estate — including DSTs — within the IRS 45-day identification and 180-day closing deadlines.

A 1031 exchange — named for Section 1031 of the Internal Revenue Code — lets an investor sell appreciated real estate and reinvest the proceeds into like-kind property without recognizing capital gains tax at the time of sale.

1921Section 1031 enacted

45 daysTo identify

180 daysTo close

100%Of gain deferrable

Overview

Section 1031 has been part of the tax code since 1921. It allows the deferral of capital gains (and depreciation recapture) when an investor sells real property held for investment or business use and reinvests the proceeds into other 'like-kind' real property. Done correctly and repeatedly, an investor can defer tax across a lifetime of exchanges and potentially receive a stepped-up basis at death.

The mechanics are unforgiving on timing. From the day the relinquished property closes, the investor has 45 calendar days to formally identify replacement property and 180 calendar days to close on it. Proceeds must be held by a qualified intermediary — never touched by the investor — and the replacement must carry equal or greater value and debt to fully defer the gain. DSTs have become a popular replacement option precisely because they can be identified and closed quickly within these windows.

How it works

Sell and escrow with a QI

Before closing the sale, engage a qualified intermediary (QI) to receive the proceeds. If you take possession of the cash, the exchange fails.

Identify within 45 days

Formally identify replacement property in writing — commonly under the 3-property rule or the 200% rule. Many investors identify a DST as a backup.

Close within 180 days

Acquire the identified replacement property within 180 days of the original sale (or your tax-filing deadline, if earlier).

Match value and debt

To defer 100% of the gain, reinvest all equity and replace all debt with equal-or-greater value; any shortfall ('boot') is taxable.

Benefits

Tax deferral

Defer federal and state capital gains plus depreciation recapture, keeping more capital compounding in real estate.

Portfolio repositioning

Move from active to passive, from one sector to another, or from one geography to another — without a taxable event.

Estate planning

Heirs may receive a step-up in basis, potentially eliminating the deferred gain — a reason 'swap til you drop' is a common strategy.

Leverage of proceeds

Reinvesting pre-tax proceeds means more equity at work than an after-tax sale would allow.

Considerations & risks

Strict deadlines

The 45- and 180-day clocks are calendar days with essentially no extensions; missing them disqualifies the exchange.

Qualified intermediary required

You cannot touch the proceeds. Choosing a reputable, bonded QI is critical to a valid exchange.

Boot is taxable

Cash taken out or debt not replaced is 'boot' and is taxed; full deferral requires matching value and debt.

Like-kind, but real estate only

Since 2018, 1031 applies only to real property; personal property no longer qualifies.

The two 1031 identification rules investors use most

Rule	What it allows	Best for
3-property rule	Identify up to 3 properties of any value; close on one or more	Most exchangers; allows a DST backup
200% rule	Identify any number of properties so long as total value ≤ 200% of the sale	Diversifying across several DSTs
95% rule	Identify any number; must close on 95% of total identified value	Rare; large multi-asset programs

A third 'reasonable' 95% rule also exists. Consult your CPA and QI.

Frequently asked questions

What is a 1031 exchange?

A 1031 exchange lets an investor defer capital gains tax by selling investment real estate and reinvesting the proceeds into like-kind real property, following IRS Section 1031 rules and deadlines.

What are the 45- and 180-day rules?

From the day your sale closes, you have 45 calendar days to identify replacement property in writing and 180 calendar days to close on it. Both run concurrently and are rarely extendable.

Do I need a qualified intermediary?

Yes. A qualified intermediary must hold the sale proceeds; if you take constructive receipt of the funds, the exchange is disqualified.

What is 'boot' in a 1031 exchange?

Boot is any value you receive that isn't like-kind real estate — typically cash taken out or debt not replaced. Boot is taxable even within an otherwise valid exchange.

Can a DST be 1031 replacement property?

Yes. A properly structured DST interest qualifies as like-kind replacement property, and because DSTs can close quickly they are frequently used to complete or back up an exchange.

How much gain can I defer?

You can defer 100% of the capital gain and depreciation recapture if you reinvest all net equity and replace all debt with equal or greater value; any shortfall is taxed as boot.

Key terms

Like-kind property: Real property held for investment or business use that can be exchanged for other such real property under Section 1031.

Qualified intermediary (QI): An independent party that holds exchange proceeds and facilitates the transaction so the investor never takes receipt of funds.

Relinquished property: The property the investor sells at the start of the exchange.

Replacement property: The like-kind property acquired to complete the exchange — which can include a DST.

Boot: Non-like-kind value (cash or debt relief) received in an exchange; it is taxable.

Depreciation recapture: Tax on previously claimed depreciation, also deferrable in a properly executed 1031 exchange.

DST replacement propertiesCurrent DST offerings that can serve as 1031 replacement property.How DSTs workThe most common 1031 replacement vehicle, explained.Market dataYields and full-cycle returns to inform replacement decisions.

Considering 1031 Exchanges for your exchange?Talk to an advisor