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1031 Exchange DST Investments

Jeffrey Cline
By Jeffrey Cline

Selling Real Estate? A 1031 may be the right ANSWER FOR YOU.

What Is a 1031 Exchange?

Under Section 1031 of the Internal Revenue Code, a 1031 exchange allows you to defer paying capital gains taxes on the sale of an investment or business property if you reinvest the proceeds into a “like-kind” property.

💡 Key Reasons to Use a 1031 Exchange

1. Defer Capital Gains Tax

When you sell investment property, you’re typically subject to:

  • Federal capital gains tax (up to 20%)

  • State income taxes (varies)

  • Depreciation recapture tax (25%)

  • Medicare surtax (3.8% for high earners)

A 1031 exchange defers all of this, freeing up more capital to reinvest.

2. Grow Wealth with Pre-Tax Dollars

Instead of giving up 25–35% of your gains to taxes, a 1031 lets you leverage the full sale proceeds to purchase a larger or better-performing asset, thereby compounding your returns.

Example:

  • Sell a property for $1 million with a $250k gain.

  • Without a 1031: You pay ~$75,000+ in taxes.

  • With a 1031: You reinvest the full $1 million tax-deferred.

3. Upgrade or Diversify Your Portfolio

A 1031 exchange lets you:

  • Consolidate multiple properties into one larger asset.

  • Diversify into different markets or asset types (e.g., from apartments to industrial).

  • Transition into hands-off investments, such as a Delaware Statutory Trust (DST) or NNN-leased commercial properties.

4. Reset Depreciation Schedule

When you acquire a new property, you get to reset the depreciation basis—creating new tax deductions, even though you deferred taxes on the sale of the old property.

5. Estate Planning Advantage

If you hold the exchanged property until death:

  • Your heirs receive a step-up in basis, eliminating deferred gains.

  • No capital gains tax is ever paid on the exchanged properties.

This makes 1031 exchanges an effective tool for multigenerational wealth transfer.

🛑 Key Rules and Limitations

  • Like-kind requirement: Both properties must be held for investment or business (not personal use).

  • 45-day identification window: You must identify replacement properties within 45 days.

  • 180-day closing window: You must close on the new property within 180 days of the original sale.

  • Use a Qualified Intermediary (QI): You cannot touch the sale proceeds.

✅ When NOT to Use a 1031 Exchange

You may opt not to do a 1031 if:

  • You want to cash out and pay taxes now.

  • You’re expecting lower capital gains rates in the future (rare).

  • You have losses that offset gains.

WHY MIGHT YOU WANT TO USE A DST?

Delaware Statutory Trust (DST) – Real Estate / Investment

A Delaware Statutory Trust is a legally recognized trust set up for business purposes under Delaware law. In real estate, it’s commonly used to allow multiple investors to own fractional interests in large income-producing properties (like apartment buildings, industrial parks, or commercial properties). DSTs are especially popular in 1031 exchange transactions, where real estate investors can defer capital gains taxes by reinvesting in another “like-kind” property.

Key features of a DST:

  • Passive investment structure – investors don’t have active management responsibilities.

  • Eligible for 1031 exchange benefits.

  • Limited liability – similar to owning shares in an LLC.

  • Income is distributed regularly.

If a 1031 exchange deal falls short or fails, using a Delaware Statutory Trust (DST) can be a lifesaving backup strategy to preserve tax deferral and avoid costly capital gains taxes. Here’s why:

💥 When a 1031 Exchange Falls Short or Fails

1031 exchanges are bound by strict deadlines and rules:

  • You must identify replacement properties within 45 days.

  • You must close within 180 days.

  • You cannot receive the proceeds from the sale directly.

  • You must reinvest 100% of the proceeds and equal or greater debt.

If you:

  • Can’t find a replacement property in time,

  • Can’t close on the deal due to financing, title, or appraisal issues,

  • Or reinvest only part of the proceeds (“boot”),

👉 You’re exposed to immediate tax liability.

🛡️ How a DST Can Save a Failing 1031 Exchange

A DST is a form of fractional real estate ownership that qualifies as “like-kind” for 1031 purposes. It is often used in the following situations:

1. Backup Identification Option

DSTs are often pre-packaged and ready-to-close quickly. Investors can:

  • Include a DST on their 45-day identification list.

  • If other deals fail, fall back on the DST to complete the exchange.

📌 Think of it as insurance for your 1031 exchange.

2. Fills the “Leftover Boot” Gap

Sometimes, a primary 1031 exchange covers most of the proceeds, but there’s a small leftover amount (“boot”). That portion would normally be taxable.

✅ Solution: Invest the remaining funds into a DST (many allow small minimums like $25k–$100k) to cover the boot and preserve full tax deferral.

3. Quick Closing – 1031 Time-Saver

DSTs typically:

  • Have pre-arranged financing (or none at all),

  • Require no individual loan qualification,

  • Allow fast, clean closings — sometimes within days.

This makes DSTs ideal when you’re nearing the end of your 180-day closing window and at risk of failing the exchange.

4. Hands-Off Passive Ownership

If you’ve managed property for years and now want:

  • No landlord duties,

  • Diversification across asset classes (like medical offices, industrial, multifamily),

  • Predictable monthly income,

…then a DST offers turnkey investment managed by a professional sponsor.

5. Low Minimum Investment

Unlike traditional property deals that require large down payments, DSTs often accept low minimum investments, enabling flexibility and fractional ownership.

🔄 Common Real-World Use Case

You sell a $2M rental property. You identify 2 traditional replacement properties during your 1031 window. One falls through due to a bad appraisal. The other seller backs out. You’re at day 44 of 45.

✅ A DST can be identified immediately and closed in time—saving your exchange and deferring your tax bill.

🚨 Pro Tip: Always Identify a DST Just in Case

Most sophisticated 1031 investors pre-identify a DST on their list even if they don’t plan to use it—just in case their primary deal collapses.

It’s like having a parachute.

Have a 1031 EXCHANGE BUT LOST THE DEAL?

IF YOU HAVE DONE A 1031 and your:

  1. Target Property Fell through leaving you felling freaked our
  2. Your side has more than the deal on the buy side so you are OVER and need a place to maximize your opportunity

1031 EXPRESS might be right for you!

1031 EXPRESS helps you maximize your opportunity, just call the DST GUY for details. In many cases he can help you even if you only have a few days left!!!

DST GUY 1(801)815-6619

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Jeffrey Cline
Jeffrey Clinehttps://KeyWordCalls.com
“Every industry is a geek away from being Uberized.” — Jeff Cline
Jeff Cline is a technologist and builder who uses technology, predictive analytics and AI to help companies increase sales, cut costs and dominate their markets — PROFIT AT SCALE. He has founded and built dozens of companies, with multiple exits and more than 25 years in business development and scaling growth. His philosophy is simple: Data doesn't lie. Tech always works. The only question is whether it's worth doing. Jeff is the founder of 1-800-MEDIGAP, the force behind R0cketShip, and is backing the next great idea through The Big Idea — up to $444,000 in tech investment for founders ready to Uberize their industry. 📰 Read: Geek for Hire — Equity →
📈 Case study · 1-800-MEDIGAP — In one of the most competitive markets in insurance, the 1-800-MEDIGAP demand engine, built on this stack, generated 30,000+ inbound calls and $25M+ in revenue at a cost per acquisition under half the industry average (company-reported).
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