Replacement Property

Replacement property is the new like-kind real estate an investor acquires to complete a 1031 exchange and defer the gain on the property that was sold (the relinquished property). To achieve full deferral, the replacement property generally must be of equal or greater value than the relinquished property, the investor must reinvest all of the net equity, and any debt retired on the sale must be replaced with new debt or additional cash. The investor must formally identify candidate replacement properties in writing within 45 days of the sale and close on the acquisition within 180 days. Replacement property can take many forms: a directly owned building, an undivided fractional interest held as a tenant in common, or a beneficial interest in a Delaware Statutory Trust, which the IRS treats as a direct interest in real estate for 1031 purposes. DSTs have become a popular replacement option for investors who want to satisfy a looming deadline, diversify across multiple institutional-grade properties, and move from active management to passive ownership without giving up tax deferral.