1031 exchange and DST questions, answered plainly.

A 1031 exchange lets you sell investment real estate and buy other investment real estate without paying capital gains or depreciation recapture tax in the year of the sale, as long as you follow strict rules about timing, value, and never touching the money.

Yes. Section 1031 has been part of the Internal Revenue Code since 1921 and is used in tens of thousands of transactions every year. It is a deliberate policy choice by Congress, not a loophole. It survived the 2017 Tax Cuts and Jobs Act and the 2025 One Big Beautiful Bill Act unchanged for real estate.

It defers the tax. The gain carries forward into your replacement property and becomes due if you later sell without exchanging again. There is one important exception: if you hold the replacement property until death, current law gives your heirs a basis equal to fair market value, which erases the entire deferred gain permanently.

There is no limit. Each exchange carries the accumulated deferred gain forward into the next property. Investors sometimes describe the strategy of exchanging repeatedly and never selling as swap until you drop, because the deferred gain disappears at death under current law.

It is fully available in 2026. Proposals to cap or repeal it have appeared in various budget frameworks over the years and none has become law. Because tax law can change, the reasonable approach is to plan around the rules as they exist rather than delaying a decision while waiting for certainty.

A qualified intermediary is an independent company that holds your sale proceeds so you never take receipt of them. Yes, you need one, and they must be engaged before your sale closes. They cannot be your CPA, attorney, real estate agent, employee, or relative, because those parties are disqualified by regulation.

On the day your relinquished property closes, meaning the day the deed transfers and escrow funds to your qualified intermediary. That same day is day zero for the 180-day period. Both clocks run at the same time.

Yes. Both periods are measured in calendar days. If day 45 falls on a Sunday or on Christmas, it is still the deadline. The only recognized extensions come from IRS disaster relief notices issued for federally declared disasters.

Your exchange period ends on the earlier of 180 days or the due date of your tax return for the year of the sale, including extensions. A sale in the fall can have its period cut short by the April filing date. Filing an extension restores the full 180 days, and for late-year sales it is usually necessary.

The exchange fails. Your intermediary returns the funds and the entire gain becomes taxable in the year of the sale. There is no partial credit and no cure. This is why experienced advisors always identify backup properties, including a Delaware Statutory Trust that can close within days.

You can freely revoke and replace identifications in writing at any time during the 45-day window. Once midnight on day 45 passes, the list is locked and you may only buy from what is on it.

Under the three property rule you may identify up to three properties at any value. Under the 200 percent rule you may identify any number as long as their combined value stays under twice the value of what you sold. Under the 95 percent rule you may identify unlimited properties but must close on at least 95 percent of the identified value. Most exchanges use the three property rule.

Almost certainly not, as long as escrow has not funded to you. Accepting an offer does not prevent an exchange. Receiving the money does. Engage a qualified intermediary immediately and have escrow send the proceeds to them instead of to you.

Yes, through a reverse exchange. An exchange accommodation titleholder buys and holds the replacement property while you sell your existing one, then transfers it to you. The same 45 and 180 day clocks apply. Reverse exchanges cost several thousand dollars more and usually require cash or a lender comfortable with the structure.

Real property held for investment or for productive use in a trade or business. Rental houses, apartment buildings, commercial and industrial buildings, self-storage, raw land, farmland, Delaware Statutory Trust interests, properly structured tenant-in-common interests, and long-term leases of thirty years or more all qualify.

No. Your primary residence does not qualify. A different provision, Section 121, lets you exclude up to 250,000 dollars of gain, or 500,000 dollars for a married couple filing jointly, if you lived in the home two of the last five years. If a property was once a rental and later became your home, or the reverse, the rules interact in complicated ways and you should get specific advice.

Only if it was genuinely held for investment. The IRS provides a safe harbor: for each of the two years before the exchange, the property must be rented at fair market value for at least fourteen days and your personal use must not exceed fourteen days or ten percent of the days it was rented, whichever is greater. Casual family use of a second home does not qualify.

Yes. Real property anywhere in the United States is like-kind to real property anywhere else in the United States. If you are exchanging out of California, be aware of FTB Form 3840, which must be filed for the year of the exchange and every year afterward until the gain is recognized. Foreign real estate is not like-kind to United States real estate.

Yes. Like-kind is interpreted broadly for real property. Almost any investment real estate can be exchanged for almost any other investment real estate, regardless of type. A rental house can become farmland, a strip center, or a fractional interest in an institutional apartment community.

It is possible but requires care. The property must genuinely be held for investment when acquired. The IRS safe harbor requires renting it at fair market value for at least fourteen days in each of the two years following the exchange, with limited personal use. Converting later also limits the Section 121 exclusion you can claim, and a five-year ownership period applies. Do not attempt this without a tax professional.

A Delaware Statutory Trust is a legal entity that owns institutional real estate and sells fractional beneficial interests to investors. IRS Revenue Ruling 2004-86 confirmed that a properly structured DST interest is treated as direct ownership of real property, so it qualifies as replacement property in a 1031 exchange. You receive income and have no management responsibility.

Most sponsors set a minimum of 100,000 dollars for 1031 exchange investors, though some accept 25,000 to 50,000 dollars from cash investors. Low minimums relative to buying a building let an exchanger spread proceeds across several trusts, property types, and regions.

Yes. DST interests are securities sold through private placements, so they are limited to accredited investors. In general that means net worth above one million dollars excluding your primary residence, or income above 200,000 dollars individually or 300,000 dollars jointly for the last two years. Most owners selling a long-held property meet the net worth test from the sale itself.

Sponsors typically project first-year cash distributions in the range of four to six percent of the amount invested, paid monthly or quarterly. Nothing is guaranteed. Distributions are projections based on the sponsor's underwriting and have been reduced and suspended in real programs. A significant portion of what you receive is usually sheltered from current tax by depreciation on the new property.

Plan on five to ten years. There is no public market for DST interests. Occasional secondary sales happen at a discount and should not be counted on. If there is a realistic chance you will need this capital within five years, a DST is not the right tool.

Front-end costs across the industry commonly total roughly eight to twelve percent of the amount invested, covering the sponsor acquisition fee, offering and organization costs, selling commissions, due diligence, and reserves. Ongoing asset management, property management, and disposition fees also apply. All of it is disclosed in the private placement memorandum, and it should be evaluated in dollars, not percentages.

A 721 exchange lets you contribute property or a DST interest to a real estate investment trust operating partnership in return for partnership units, without triggering tax. It gives you exposure to a whole portfolio and eventual partial liquidity. The tradeoff is permanent: partnership units are not like-kind real property, so you can never do another 1031 exchange with them.

Boot is anything you receive that is not like-kind property, most commonly cash you keep or mortgage debt that was paid off and not replaced. Boot does not ruin the exchange. It is simply taxable, and it is taxed first out of your gain. Partial exchanges where you deliberately take some cash are perfectly legal and fairly common.

To defer one hundred percent of the tax, yes. You must buy replacement property of equal or greater value, reinvest all net proceeds, and replace any debt that was paid off, either with new financing or with additional cash of your own. Anything you keep is taxable boot.

Depreciation recapture is the tax on the portion of your gain equal to the depreciation you deducted over the years, charged federally at up to twenty five percent. It applies whether or not you actually claimed the deduction. A 1031 exchange defers depreciation recapture in full along with the capital gain.

IRS Form 8824 is filed with your return for the year of the sale, showing the properties, dates, and deferred gain. California owners exchanging into out-of-state property also file FTB Form 3840 for that year and every year afterward until the gain is recognized. Missing the annual California filing can accelerate the state tax.

A qualified intermediary typically charges roughly 1,000 to 1,500 dollars for a standard delayed exchange, plus a modest fee per additional property. Reverse and improvement exchanges cost several thousand dollars more. Your CPA will charge for Form 8824. If you use a DST, the sponsor fees described above apply on top.

This requires a drop and swap, where the partnership distributes tenant-in-common interests to the individual partners before the sale so each can choose their own path. Because the taxpayer who sells must be the taxpayer who buys, the restructuring has to happen well in advance, ideally a year or more, and requires a tax attorney. Doing it in escrow invites an audit.

Probably not, and it is worth being skeptical of anyone who says otherwise. Inherited property generally receives a basis stepped up to fair market value at the date of death, which means selling soon afterward produces little or no taxable gain. Get the date-of-death appraisal before doing anything else.

It is restricted. In a related party exchange, both parties generally must hold their new properties for at least two years or the exchange is retroactively disqualified with interest. Buying replacement property from a related party who cashes out receives heavy IRS scrutiny. Involve a tax attorney before attempting one.

You receive your share of the sale proceeds and choose between taking the cash and paying the accumulated deferred tax, or rolling into another 1031 exchange into another DST or a property. Some DSTs are structured to convert into REIT units through a 721 exchange instead. We plan this decision with clients well before it arrives.

Under current law your heirs receive the interests with a basis stepped up to fair market value at the date of your death. The deferred gain and deferred depreciation recapture from every exchange you ever did are eliminated. Fractional interests are also considerably easier for multiple heirs to divide than a building.

Qubera Wealth Management is a fee-only registered investment adviser. We do not earn commissions for recommending that you sell, exchange, or hold. Fees are disclosed in writing before you agree to anything and are described in our Form ADV brochure, which is linked in the footer of every page on this site.