1031 Exchange Into a DST: A Quick Guide Through the Simple Investment Process

For many real estate investors, selling an investment property can create a significant tax burden. A 1031 exchange offers a way to defer capital gains taxes by reinvesting proceeds into another qualifying investment property — and for investors who are ready to step away from active management, a Delaware Statutory Trust (DST) can serve as that replacement property. Under IRS Revenue Ruling 2004-86, a properly structured DST interest qualifies as like-kind replacement property.

The process is more straightforward than most investors expect. It is also less forgiving than most investors expect. Here is how it works, in order.

Step 1: Plan before you list

The most consequential decisions in a 1031 exchange happen before the sale closes. You will need a Qualified Intermediary (QI) engaged prior to closing — if sale proceeds touch your account, even briefly, the exchange fails and the full tax bill comes due. This is also the window to model your numbers: how much equity must be reinvested, how much debt must be replaced, and whether a full or partial deferral makes sense for your situation.

Step 2: Close the sale — and start the clock

The day your relinquished property closes, two deadlines begin running simultaneously. You have 45 calendar days to identify replacement property in writing to your QI, and 180 calendar days to complete the acquisition. There are no extensions for weekends, holidays, or deals that fall apart.

Step 3: Identify your DST investments

Within the 45-day window, most investors use the Three-Property Rule (identify up to three properties of any value) or the 200% Rule (identify any number of properties whose combined value does not exceed 200% of the relinquished property's sale price). Because DST minimums typically start around $100,000, a single exchange can often be diversified across multiple DSTs — different sponsors, sectors, and geographies.

Step 4: Complete due diligence and subscribe

Each DST is a private placement, offered through a Private Placement Memorandum (PPM). This is where the real work lives: evaluating the sponsor's track record, the asset's fundamentals, the fee structure, the debt terms, and the exit assumptions. Read the risk factors. All of them. Subscription paperwork is then completed, your QI wires funds directly to the trust, and you receive a beneficial interest in the DST.

Step 5: Own passively

From that point forward, the sponsor manages the property. Investors typically receive monthly or quarterly distributions (which are not guaranteed), annual tax reporting, and updates on the asset — without tenant calls, maintenance decisions, or property-level management responsibilities.

What deserves caution

DSTs are illiquid securities with no secondary market — plan to hold for the life of the program, typically five to ten years. Distributions can be reduced or suspended if a property loses tenants or underperforms. Investors give up control: DST trustees, not investors, make property decisions. And fees — upfront and ongoing — reduce the amount of your equity that actually goes to work. None of this makes DSTs unsuitable; it makes them worth understanding completely before the 45-day clock forces a rushed decision.

If you have a sale approaching — or a clock already running — the best time to talk through your options is now. A short conversation costs nothing and can prevent an expensive mistake.