Frequently Asked Questions

Yes. Your sale agreement should include language allowing your rights under the contract to be assigned to a Qualified Intermediary, along with a provision requiring the other party to cooperate with the exchange. Having the proper language in place helps protect the structure of your 1031 exchange and avoid problems later.

Before you sign, have the professional handling your closing review the contract to make sure the appropriate 1031 exchange language is included.

A properly structured 1031 exchange can defer federal capital gains tax and depreciation recapture, allowing more of your sale proceeds to be reinvested in replacement property. The tax is deferred, not forgiven, and the tax treatment depends on your individual circumstances.

Section 1031 has been part of the Internal Revenue Code since 1921. The Tax Cuts and Jobs Act of 2017 narrowed it to real property only — personal property no longer qualifies.

Delaware Statutory Trusts became eligible replacement property in 2004 under IRS Revenue Ruling 2004-86.

For 1031 purposes, like-kind means real property held for business or investment use exchanged for other real property held for business or investment use. The test is broad — an apartment building and raw land can be like-kind to each other.

Examples include raw land, multi-family and single-family rentals, retail centers, office buildings, industrial facilities and storage facilities.

Property held for personal use, such as a primary residence, does not qualify.

There are several types of 1031 exchanges, including delayed, reverse and improvement exchanges. A delayed exchange is the most common and gives you up to 45 days to identify replacement property and 180 days to complete the exchange. Reverse and improvement exchanges involve additional rules, costs and complexity. Your qualified intermediary and tax advisor can help determine which structure is appropriate for your situation.

A qualified intermediary (QI) facilitates a deferred 1031 exchange by holding the sale proceeds during the exchange and transferring them toward the replacement property. Using a QI helps prevent you from receiving or controlling the proceeds before acquiring replacement property. Your QI should be engaged before the sale of your relinquished property closes.

More on choosing a qualified intermediary

You must identify potential replacement property in writing to your qualified intermediary no later than midnight on the 45th calendar day after the sale of your relinquished property closes.

If your sale closed on October 31, day one is November 1 and the deadline is December 15. The 45 days are calendar days — if the 45th day falls on a Saturday, Sunday or holiday, the deadline is not extended to the next business day.

Calculate your dates

Identification must be in writing, signed by you, unambiguously describing the property, and delivered to your qualified intermediary before midnight on day 45. A conversation does not count, and neither does telling your agent.

You choose one of three rules:

• Three-property rule. Identify up to three properties of any value, and acquire one, two or all three. Most people use this.
• 200% rule. Identify any number of properties, provided their combined value does not exceed twice the value of what you sold.
• 95% rule. Identify any number of any value, but you must then acquire at least 95% of the total value identified. Rarely used, and unforgiving.

You can revoke and replace an identification as many times as you like before day 45. After it, the list is fixed.

You must complete the exchange — including taking title to all replacement property — by the earlier of:

• Midnight on the 180th calendar day after your relinquished property sale closed, or
• The due date of your federal income tax return for the year of that sale, including extensions

The second date only matters if your sale closed late in the year. If you closed on or after about October 17, your 180th day falls after the April filing deadline, and you would need to file for an extension in order to use the full 180 days.

A 1031 exchange may not be worthwhile if the tax savings are small, you need the sale proceeds for other purposes, you have tax losses that can offset the gain, or the exchange would force you into an investment that does not fit your goals. The 45-day deadline should not pressure you into making an unsuitable investment. Discuss your specific situation with your tax advisor and investment professional.

Not necessarily — but to defer the full tax you need to do two things: reinvest all of the net proceeds and replace the debt that was paid off on the property you sold, either with new debt or with additional cash.

Anything you hold back is called boot, and it is taxable to the extent you have gain. Taking $50,000 out of a sale does not fail the exchange; it means you have a partial exchange and pay tax on that $50,000.

Keep in mind you usually cannot take that cash at closing. Your qualified intermediary holds all of the proceeds and can only release leftover funds once the exchange period ends.

To fully defer taxes in a 1031 exchange, you must reinvest an equal or greater amount of equity and replace the debt associated with the relinquished property. However, the debt does not have to be replaced with debt. If the replacement property has less debt, you can make up the difference by investing additional equity. If you do not fully replace the value, equity, or debt requirements, the portion not replaced may be treated as taxable “boot.”

This means you can structure a replacement investment with a different debt level while still meeting the requirements for full tax deferral. DSTs can provide flexibility by allowing you to invest in one or multiple properties with different levels of debt.

Not in the ordinary course. There is no application, no hardship provision, and no extension for a deadline falling on a weekend or holiday.

The one real exception is federally declared disaster relief. Under Revenue Procedure 2018-58, when the IRS issues a disaster declaration covering your area, affected taxpayers may postpone the 45-day and 180-day deadlines — up to 120 additional days, or to the date given in the IRS notice, whichever is later.

Relief is not automatic in the sense of applying to everyone. It depends on the terms of the specific IRS notice and on whether you qualify as an affected taxpayer, so check with your tax advisor rather than assuming.

If you do not properly identify replacement property within 45 days, the exchange generally fails and the gain may become taxable. The 45-day deadline is strict, so start identifying potential replacement properties as early as possible. If you are approaching the deadline, contact your qualified intermediary and tax advisor immediately.

Sometimes — but only if it has genuinely been held for investment rather than for your own use. A vacation home you use yourself does not qualify simply because it has appreciated.

Revenue Procedure 2008-16 sets out a safe harbor. The IRS will not challenge the exchange if, in each of the two 12-month periods before it:

• You owned the property, and
• You rented it at a fair market rent for at least 14 days, and
• Your own personal use did not exceed the greater of 14 days or 10% of the days it was rented at fair market rent

A similar test applies to the replacement property afterwards. Falling outside the safe harbor does not automatically disqualify you, but it does mean you are relying on facts and circumstances rather than a bright line — a conversation for your tax advisor before you sell.

Section 1031 sets no minimum holding period. The test is whether the property was held for productive use in a trade or business or for investment, and that is a question of your intent, evidenced by what you actually did.

Because intent is hard to prove, many advisors treat a holding period spanning more than one tax year — often at least twelve months — as a sensible minimum. That is a matter of caution, not a rule.

There is one statutory two-year rule, and it applies to exchanges with related parties: if either side disposes of the property within two years, the deferral can be undone.

Property bought to fix and resell is held as inventory, not investment, and does not qualify regardless of how long you keep it.

No. Shares in a real estate investment trust (REIT) are securities, not real property, so they are not like-kind and cannot be acquired directly as replacement property in a 1031 exchange.

There is an indirect route that some investors use. After completing an exchange into a Delaware Statutory Trust, a sponsor may later contribute the property to a REIT’s operating partnership under Section 721, and investors receive operating partnership units instead. That transaction can itself be tax-deferred.

It is worth understanding the trade-off before relying on it: once you hold operating partnership units, you can no longer do a further 1031 exchange with that interest. Whether a 721 option exists at all is determined by the sponsor and set out in the offering documents, not by you.

Definitions of the terms used here

Almost certainly not. The exchange has to be set up before the sale closes, with the qualified intermediary in place and the exchange documents signed, so that the proceeds go to the QI and never to you.

Once you have received the funds — or have the right to direct them — you have taken receipt, and the transaction is a sale rather than an exchange. There is no procedure for putting that back together afterwards.

If you are thinking about selling, engage a qualified intermediary before you get to closing. It costs nothing to have the option in place and not use it.

The general rule is that the taxpayer who sells must be the taxpayer who buys. The tax return reporting the sale and the one acquiring the replacement property need to be the same.

The practical exception is entities the IRS disregards for tax purposes. A single-member LLC that files nothing of its own, or a revocable living trust, is generally treated as the individual behind it — so buying in a single-member LLC you own can be consistent with the rule.

A multi-member LLC, a partnership or a corporation is a different taxpayer, and acquiring there can break the exchange.

Raise it with your CPA and your qualified intermediary before, not afterwards.

The entity can. The partnership or LLC is the taxpayer, so it can sell property and complete an exchange in its own name, with all the partners continuing together into the replacement property.

The difficulty arises when partners want to go separate ways — some to exchange, some to take cash. Partnership interests are expressly excluded from 1031, so a partner cannot simply exchange their share.

Planning techniques exist for this, generally involving restructuring how the property is held before a sale. They carry real risk: the IRS may consider whether the new owners held the property for investment long enough, and timing is important.

This is one of the most commonly litigated areas in 1031, and it is squarely a question for your CPA and attorney, well before the property goes under contract.

A DST is a Delaware Statutory Trust — a legal entity that holds title to investment real estate. Investors own a beneficial interest in the trust, and under IRS Revenue Ruling 2004-86 that interest is treated as direct ownership of real property, which is what allows it to serve as replacement property in a 1031 exchange.

Ownership is passive. The trustee makes all decisions about the property, including when it is sold. Investors have no management control and no say over the timing of a sale.

Debt at the trust level is typically non-recourse to investors, meaning the lender’s remedy on default is the property itself rather than an investor’s other assets.

Minimum investment amounts are set by the sponsor and vary by offering, typically starting at $100,000. Because a DST can hold more than one property, and because the minimum is lower than buying a whole building, some investors use DSTs to spread exchange proceeds across several properties. Spreading exposure does not eliminate risk or assure a profit.

DST investments are illiquid, involve risk including possible loss of principal, and are suitable only for accredited investors.

Yes. A 1031 exchange can be divided among multiple replacement properties, including multiple DST investments. Investing in more than one DST may allow you to diversify across different properties, geographic locations, property types, tenants, sponsors, or debt structures while using the proceeds from a single exchange.

In a tenants-in-common structure, each investor acquires an undivided fractional interest in the property and receives a deed. A TIC is limited to a maximum of 35 co-owners.

TIC owners generally share management responsibility and vote on major decisions. Lenders often require personal guarantees, and TIC debt is commonly recourse, meaning the lender can pursue you personally for any shortfall after taking the property.

The main difference is control. In a DST the trustee makes every decision about the property, including when it is sold. In a TIC the co-owners make those decisions themselves.

• Owners: DST up to 1,999 · TIC maximum 35
• Management: DST passive · TIC active
• Debt: DST typically non-recourse · TIC commonly recourse, often with personal guarantees
• Title: DST beneficial interest in the trust · TIC deeded fractional interest

An accredited investor is defined in Rule 501 of Regulation D. An individual generally qualifies by meeting any one of these:

• Income over $200,000 in each of the two most recent years — or $300,000 jointly with a spouse or spousal equivalent — with a reasonable expectation of the same in the current year
• Net worth over $1,000,000, alone or jointly, excluding the value of a primary residence
• Holding a Series 7, Series 65 or Series 82 license in good standing

Entities qualify on separate criteria. 1031 DST offerings may only be sold to accredited investors.

Yes. Taxation of DST distributions is separate from the tax deferral provided by a 1031 exchange. A DST may generate taxable income from rental operations, although depreciation and other expenses may offset some or all of that income. The amount of taxable income can vary by property and offering and is reported to investors on the applicable tax documents.

Yes. DST distributions are not guaranteed and may increase or decrease over time depending on the performance and circumstances of the underlying property. Factors such as rental income, occupancy, operating expenses, property taxes, insurance, financing costs, and other property-level expenses can affect the amount distributed to investors.

DST costs can vary, so it is important to understand the fees and expenses associated with an investment.

Up front. Selling commissions, dealer-manager fees, offering and organizational costs, and the sponsor’s acquisition fee. Together, these are often referred to as the load. As a result, less than 100% of your investment is applied directly to the purchase of the real estate.

Ongoing. Asset management fees paid to the sponsor, property management fees, trustee fees, lender costs, and reserves.

At the end. A disposition fee may be payable to the sponsor when the property is sold.

These fees and expenses are disclosed in the Private Placement Memorandum, usually in a fees and expenses table, and vary between sponsors and offerings.

Full cycle means the property has been sold and the proceeds distributed to investors. The offering has run its course.

The decision to sell belongs to the trustee and the sponsor, not to you. Offering documents often describe an anticipated hold period of several years, but that is an expectation rather than a commitment — a property may be held longer or sold sooner, and there is no assurance of the price achieved or of any particular outcome.

When it happens you generally have three routes:

• Complete another 1031 exchange into new replacement property and continue deferring
• Take the cash and pay the tax that has been deferred
• Where the sponsor offers it, contribute to a REIT’s operating partnership under Section 721 — after which further 1031 exchanges with that interest are no longer possible

If you intend to exchange again, plan ahead. The 45-day and 180-day clocks start over from the sale, and a full-cycle event can arrive with limited notice.

If you own a DST through a 1031 exchange and pass away, your investment generally passes to your beneficiaries through your estate. Your beneficiaries continue to receive any income distributions from the DST. In many cases, inherited property receives a step-up in tax basis to its fair market value at the time of death, which may eliminate some or all of the deferred capital gain and depreciation recapture associated with the investment.

Because estate and income tax rules can vary, investors should consult their tax and estate-planning advisors regarding their specific circumstances.

DST investments are private placements. They are speculative, involve substantial risk including the possible loss of your entire principal, and are not suitable for every investor. The Private Placement Memorandum for each offering contains the full risk factors and should be read before investing. What follows is a summary, not a substitute for it.

• Illiquidity. There is no public market for DST interests. You should assume you cannot sell when you want to, and possibly not at all before the property is sold.
• No control. The trustee makes every decision, including when and at what price the property is sold. You have no vote and no say over timing.
• Structural rigidity. Revenue Ruling 2004-86 prevents the trust from raising new capital, refinancing, or renegotiating leases. If circumstances change, the trust’s ability to respond is limited by design.
• Leverage. Most DSTs use debt. Leverage magnifies losses as well as gains, and a decline in value can eliminate equity.
• Tenant and vacancy risk. Distributions depend on rent being paid. A single-tenant property carries concentrated exposure to that one tenant.
• Market and interest rate risk. Property values, rents and financing costs all move, and not always in your favor.
• Sponsor risk. Performance depends on the sponsor’s judgment, solvency and management.
• Tax risk. Treatment depends on the structure qualifying under current law. Rules can change, and the IRS may take a different view of a given transaction.
• Costs. Fees and the offering load reduce the capital invested and the return you receive.

Distributions are not guaranteed, may be reduced or suspended, and may include a return of capital. Past performance of any sponsor or property does not indicate future results.

Full risk disclosures