Understanding 1031 Like‑Kind Exchanges: Current Rules, Regulations and Delaware Statutory Trust (DST) Options

I've received many questions from some of our investors over the past few weeks and thought it would be a good idea to provide a consolidated overview of 1031 exchanges and some of their benefits. Hopefully this clears up some confusion.

Real estate investors often employ Section 1031 like-kind exchanges as a tax deferral strategy when they sell an investment or business property and acquire a new one. Instead of paying capital gains taxes on the sale of the property, Section 1031 allows taxpayers to defer taxes by reinvesting proceeds in a new “like-kind” property. According to the IRS, tax deferral under Section 1031 is not tax-free, as taxes on the gain will eventually be due when the replacement property is sold. Knowledge of the rules and alternatives in 2026, including the increasing popularity of Delaware Statutory Trusts (DSTs), can help investors make informed decisions and avoid forfeiting the tax benefits.

Eligibility and Basic Requirements

Who is eligible to perform a 1031 exchange?

Section 1031 exchanges are for individuals, corporations, limited liability companies, partnerships, trusts, and other U.S. tax-paying entities who own investment or business properties. The basic requirements for eligibility are as follows:

Investment/business use – The property from which you are exchanging (relinquished property) and the property to which you are exchanging (replacement property) must be held for productive use in a trade, business, or for investment purposes. This does not include primary residences or vacation homes.

Like-kind property – Real property can be exchanged for almost any other type of real property. This includes exchanging a rental property for commercial property, vacant land, an apartment building, or an interest in a Delaware Statutory Trust (DST). However, U.S. property cannot be exchanged for property located outside the United States, and real property cannot be exchanged for personal property.

Same taxpayer – The same taxpayer who sells the relinquished property must also acquire the replacement property. Title changes (such as adding a spouse or an LLC) during the exchange process can result in a violation of the “same taxpayer rule” and result in the loss of the tax deferral.

Equal or greater value – In order to completely defer the gain, the investor must replace the value and equity of the property surrendered. The additional equity can be used in place of debt, but anything less than that will result in “boot,” which is taxable.

1031 Exchange Rules: Deadlines, Identification Requirements, and IRS Compliance

45-Day Identification & 180-Day Completion

The deadline is one of the most important parts of a deferred 1031 exchange. Once the sale of the relinquished property is completed, the investor has 45 days to identify the potential replacement properties. The identification must be in writing and signed by the taxpayer, and it must be handed over to the qualified intermediary (QI) or seller. The replacement property must be received and the exchange completed within 180 days of the sale (or by the due date of the taxpayer’s return, whichever is earlier). These deadlines are absolute and cannot be bargained with, and failure to meet either deadline will result in the failure of the exchange.

However, in extraordinary situations such as federally declared disasters, the IRS may waive deadlines. For instance, in 2025, the IRS provided relief to the victims of the California wildfires by extending any 45-day or 180-day deadline between 7 January 2025 and 15 October 2025 to 15 October 2025.

Qualified Intermediary and constructive receipt

To avoid constructive receipt of funds by investors, the IRS must have a qualified intermediary (QI) hold the proceeds of the sale until the new property is acquired. You cannot be your own QI, and your attorney, real estate agent, or accountant cannot be your QI if they have done work for you in the past two years. The QI prepares exchange agreements, holds funds in escrow, and assists the exchanger in meeting the 45-day and 180-day deadlines. This is very similar to the custodian role for Self-Directed IRAs which I covered in another article.

Like-kind property exclusions

There are some properties that cannot be exchanged under Section 1031: inventory or stock in trade, stocks, bonds, notes, securities, debt, partnership interests, and certificates of trust. Property held for personal use is also excluded. Since the Tax Cuts and Jobs Act of 2017, Section 1031 only applies to real property exchanges. Personal property exchanges, such as cars or artwork, are no longer valid.

Vacation and second homes

Personal vacation homes cannot be exchanged unless they satisfy certain rules. To qualify, there must be significant rental income for at least two years, and personal use cannot exceed 14 days or 10 % of the time the home is rented each year. A 2008 IRS safe harbor rule requires that, for each of the first two years following the exchange, the replacement property be rented for at least 14 days at fair rental value and the owner’s personal use not exceed 14 days or 10 % of rental days. If you intend to use an exchanged property as your home, you must follow the five-year rule: all deferred gains may be partially recognized if the property is sold within five years of the exchange.

Identification rules: Three-property rule, 200% rule, and 95% exception

The IRS permits several ways to identify replacement properties:

Identification rule	Requirements	Use cases
Three-property rule	You may identify up to three properties of like kind of any value, and you must close on at least one of them.	Most common approach; 'backup' properties safeguard against being forced to settle for second best.
200% rule	You can identify an unlimited number of properties as long as the total FMV does not exceed 200% of the value of the relinquished property.	Good for spreading risk over several smaller properties.
95% exception	You can identify an unlimited number of properties of unlimited value if you acquire at least 95% of the total value identified.	Provides a lifeline in case market values escalate unexpectedly; however, you must close on almost all of the value identified.

Failing to meet these identification rules or deadlines will invalidate the exchange and trigger taxation.

Types of 1031 Exchanges

The following are the types of 1031 exchanges covered under Section 1031:

• Deferred (Standard) exchange – This is the most popular form of 1031 exchange, wherein you sell the relinquished property and subsequently acquire replacement property within the 45- and 180-day time frames.

• Reverse exchange – In this type of exchange, you first acquire the replacement property, usually through an Exchange Accommodation Titleholder, and then sell the relinquished property. The time frames for reverse exchanges are the same as those for deferred exchanges: 45 days for identification and 180 days for completion.

• Improvement/Construction exchange – If you are interested in using the proceeds of a 1031 exchange to improve a property, a third party holds title to the property during the improvement phase. The improvements must be identified within 45 days and completed within 180 days.

• Multi-property exchange – You can exchange one property for multiple properties or multiple properties for a single property. However, multiple exchanges can be complex to manage.

Special Considerations

Debt replacement and “boot”

In order to completely defer capital gains, the purchase price and equity in the replacement property must be equal to or greater than that of the relinquished property. You are not required to replace the debt exactly; you can inject additional equity or secure new financing. If the value or equity is less, the difference is considered boot and is taxable. Boot can take the form of cash, installment notes, or a reduction in debt not offset by new equity.

Partial exchanges

You can take some proceeds from the sale and still qualify for a partial 1031 exchange. The amount of proceeds retained is considered boot (taxable), but the balance of the gain can still be deferred. Partial exchanges are often used when investors require cash but still want to defer gains.

Related parties

Related party exchanges (between family members or entities under common ownership) are allowed but are subject to IRS scrutiny. If either party sells their property within two years of the exchange, the IRS may invalidate the exchange. Correct documentation and compliance with the two-year holding period under IRC §1031(f) are critical.

Safe harbor for converting rental to primary residence

When a replacement property is converted to a primary residence, a safe harbor established in 2008 requires renting the property to another person for at least 14 days per year and using the property not more than 14 days or 10% of the rental days. Renting the property for at least two years before the conversion will further protect the taxpayer. Selling the property within five years of the exchange may result in the recognition of previously deferred gains.

Proposed Changes and Legislative Outlook (2025-2026)

Section 1031 has been subject to periodic proposals to limit or repeal the benefits of the section. The Biden Administration’s Fiscal Year 2025 budget proposes to limit the deferral to $500,000 of gain per taxpayer ($1 million for married couples filing jointly) per year, with gains in excess of these amounts subject to tax in the year of transfer. These proposals are also included in the White House’s description of closing the “like-kind exchange loophole.” As of February 2026, these proposals have not been adopted; Section 1031 remains fully available.

Delaware Statutory Trusts (DSTs) as Replacement Property

What is a DST?

A Delaware Statutory Trust is a legal entity formed under Delaware law to hold one or more income‑producing real estate properties. Investors purchase beneficial interests in the trust and thus own an indirect interest in the underlying real estate. IRS Revenue Ruling 2004‑86 clarified that beneficial interests in a properly structured DST qualify as like‑kind real property for Section 1031 purposes, allowing investors to defer capital gains by exchanging into a DST.

How DSTs help meet 1031 requirements

DST sponsors manage the property acquisition, financing, due diligence and ongoing operations, making DSTs a passive investment. Because sponsors often maintain a pipeline of pre‑vetted properties with low minimum investment amounts (commonly starting around $100,000), exchangers can quickly allocate proceeds into one or more DSTs. This helps them satisfy the 45‑day identification and 180‑day completion deadlines. DSTs also serve as backup properties; if a direct property falls through, the exchanger may still close on a DST within the exchange period. Selecting a DST as one of the three identified properties can help avoid boot when there is leftover equity, because minimum investment thresholds are relatively small.

Benefits of DSTs

In addition to meeting deadlines, DSTs have the following benefits:

• Diversification – Investors can diversify their investments by investing in various DSTs that own different types of properties (multifamily, medical office, industrial, etc.).

• Access to institutional-grade properties – DSTs typically own large institutional-grade properties that are not accessible to individual investors.

• Simplified estate planning – The beneficial interest in a DST is personal property and can be easier to divide among heirs. If an interest in a DST is inherited, a step-up in basis (fair market value at the time of death) is given, which eliminates deferred gains for estate tax purposes.

• Passive investment – The sponsor manages the properties, tenants, and reporting, which makes for a passive investment.

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Risks and limitations

DST investments come with important caveats:

• Illiquidity – DST interests are not publicly traded; investors should be prepared to hold them for 5–10 years or longer.

• Fees and costs – Upfront sales commissions, organizational expenses, asset‑management fees and disposition fees can reduce returns.

• Limited control – Investors have no voting rights. To maintain 1031 eligibility, DST trustees are restricted by IRS guidelines known as the “Seven Deadly Sins.” These restrictions prohibit accepting new capital, renegotiating loans or borrowing additional funds, reinvesting sales proceeds, making significant capital improvements, investing in speculative instruments and other actions that would convert the investment into an active trade. The SDO CPA guide notes that these restrictions ensure passivity but limit flexibility.

• Market and property risk – Like all real estate investments, DSTs are subject to market fluctuations, interest‑rate changes and economic downturns.

DST vs. REIT/UPREIT

Investors cannot exchange directly into a Real Estate Investment Trust (REIT) or UPREIT, because those structures involve ownership of securities or partnership interests that do not qualify as like‑kind property. DSTs, however, are treated as real property and qualify for 1031 treatment. Some investors employ a DST‑to‑UPREIT strategy: they exchange into a DST, then later contribute their DST interest to a REIT’s operating partnership (a taxable event) in exchange for OP units.

Step-by-Step Guide to a 1031 Exchange

Some steps to help all those considering the 1031 route:

• Professional Help – Consult a tax professional and real estate attorney before proceeding.

• Use a Qualified Intermediary – Choose a reputable QI to draw up paperwork, hold funds, and ensure 1031 compliance.

• Selling Your Property – Coordinate with the QI prior to closing; all proceeds must go to the QI. Just like a SDIRA, you should never accept the money personally.

• Replacement Property Identification – Within 45 days, sign a written list of possible replacement properties to your QI, in accordance with identification requirements. Consider adding a DST as a fall-back option.

• Acquiring Replacement Property – Acquire the replacement property (or properties) within 180 days or by the due date of your tax return.

• File the Exchange – File Form 8824 to report the like-kind exchange, including property descriptions, identification, transfer dates, relationship of parties, value exchanged, and basis computation.

Conclusion and Final Thoughts

A 1031 like-kind exchange can be an effective means of preserving capital, deferring taxes, and building a real estate portfolio. However, the tax code is very specific: you must transfer investment or business real property, identify replacement properties within 45 days, effect the exchange within 180 days, and not be in constructive receipt of the funds. The ability to identify multiple properties, including Delaware Statutory Trusts, allows investors to compete effectively in a market with multiple buyers and defer taxes on boot. DSTs offer ready-to-acquire, professionally managed properties and can be a backup plan or diversification tool, but they are illiquid, expensive, and restricted.

Although plans to limit the deferral of taxes under Section 1031 (such as the Biden Administration’s 2025 budget proposal to limit deferred gain to $500,000 per taxpayer) are still pending, as of February 20, 2026, Section 1031 is still in effect. Investors contemplating a 1031 exchange should begin planning early, seek the advice of experienced professionals, and stay abreast of changes in the tax code. When properly structured, whether directly owning properties or using a DST, a 1031 exchange can be the foundation of a long-term tax-efficient real estate investment program.