A 1031 exchange can defer gain when you sell real estate held for investment or business use and acquire qualifying replacement property. Meeting the deadlines is essential, but choosing suitable property matters just as much. Horizon 1031 helps investors evaluate DST options within their broader exchange plans.

Which Properties Qualify for a 1031 Exchange?

Section 1031 generally applies to investment or business-use real property, not a personal residence or property held primarily for sale. “Like-kind” is broad: for example, an apartment building could be exchanged for an industrial property, owned traditionally or within a Delaware Statutory Trust.

The Need for a Qualified Intermediary

For a typical deferred exchange, engage a qualified intermediary before your sale closes. The intermediary handles exchange proceeds and documentation. Taking actual or constructive receipt of the proceeds can jeopardize tax deferral. The IRS exchange overview explains these fundamentals.

The 45-Day and 180-Day Exchange Deadlines

Both deadlines run from the transfer of your relinquished property, concurrently, not consecutively:

  • 45 days: Identify your potential replacement properties.
  • 180 days: Complete the acquisition, or close by your federal income tax return’s due date, including extensions, for the sale year if that date comes first.

These are calendar-day periods. A tax-return extension may be necessary to use the full 180 days for a late-year sale. Importantly, do not assume weekends or holidays provide extra time as these are calendar days. Exceptions are rare, though specific IRS disaster relief may create them. 

How Must You Identify Replacement Property?

Your identification must be written, signed, and delivered by the deadline to an eligible exchange participant, commonly your qualified intermediary. Clearly describe the property, usually with a street address or legal description. Listing "Delaware Statutory Trust" or the name of an investment sponsor alone is insufficient.

The Treasury identification rules provide three approaches:

  • Three-property rule: Identify up to three properties, regardless of their total value.
  • 200% rule: Identify more than three properties if their combined fair market value does not exceed twice the aggregate value of the relinquished properties.

  • 95% exception: If you exceed both limits, you generally must acquire at least 95% of the aggregate value of all properties identified.

How Can DSTs Make an Exchange Easier?

Qualifying DST interests can serve as replacement property under IRS Revenue Ruling 2004-86. Instead of buying and managing an entire building, you acquire a beneficial interest in a trust that owns real estate.

DST sponsors typically acquire properties and arrange financing before investors subscribe. That can reduce the need to negotiate a separate property purchase or obtain an individual loan during your exchange window. Flexible investment amounts may also help allocate proceeds across offerings or address a remaining exchange balance.

A DST may serve as a primary replacement investment or an identified backup. Ownership is passive, with the sponsor managing the property. However, allocations remain subject to availability, investor eligibility, subscription acceptance, and timely closing.

Plan for Tax Deferral and Investment Suitability

For full deferral, you generally need sufficient replacement-property value, reinvest all net exchange equity, and address debt relief with replacement debt or additional cash. Cash retained and other “boot” may trigger taxable gain. Horizon 1031 embraces collaboration with clients' tax advisors to review the numbers and confirm all requirements are met.

DSTs do not extend deadlines or eliminate investment risk. It is critical to review all aspects of a given offering, including fees, property fundamentals, and sponsor experience, before making an identification. Horizon 1031 guides prospective investors through an in-depth evaluation of DST options to ensure not only that a clients' basic exchange needs are met, but that their investment plan is suitable for them based on their financial profile and objectives.