A Typical 1031 Exchange Has Three Basic Steps:

Step 1

Exchanger sells property, known as the relinquished property, and the proceeds are escrowed with a Qualified Intermediary (QI)

Step 2

Qualified Intermediary, through a written agreement with the investor, transfers funds for purchase of replacement property

Step 3

Exchanger receives new property
or DST interest

1031 Exchange Timeline

Property exchangers must follow a specific timeline to take advantage of the benefits of a 1031 transaction. The entire 1031 exchange timeline can take no longer than 180 days.

Day

1

Sell Relinquished Property

By Day

45

Identify Replacement Property

By Day

180

Acquire Replacement Property

Delaware Statutory Trusts (DSTs): A Powerful 1031 Exchange Tool

DSTs allows multiple investors to own fractional interests in a single property or portfolio of properties, gaining access to institutional-quality properties that may otherwise be out of reach. Beneficial interests in DSTs are considered “like-kind” property for purposes of 1031 exchanges.

One of the major benefits of a DST is its passive investment structure that takes all decision-making responsibilities out of your hands and places them into the hands of an experienced sponsor-affiliated trustee.

Like-Kind Real Estate

To complete a successful Section 1031 tax-deferred exchange, the replacement property must be like-kind to the relinquished property. Some examples of like-kind properties include:

  • Multifamily Apartments
  • Retail Centers
  • Student Housing
  • Hospitality
  • Self-Storage Facilities
  • Industrial Warehouses
  • Senior Living

Any real estate held for productive use in a trade or business or for investment purposes is considered like-kind. A primary residence would not fall into this category, however, vacation homes or rental properties may qualify.

The Role of a Qualified Intermediary

In order to complete a 1031 exchange, an investor must not take “constructive receipt” of the proceeds from the sale of the relinquished property. The Qualified Intermediary (QI) is an entity who, for a fee, acts to facilitate the 1031 exchange by entering into a contractual agreement for the exchange of properties, avoiding constructive receipt.

QI Brochure
Important Topics to Consider When Selecting a Qualified Intermediary for a 1031 Exchange (PDF) DOWNLOAD

Key Benefits of DST 1031 Exchanges

No Management Responsibilities

The DST is the single owner and agile decision maker on behalf of investors.

Access to Institutional-Quality Property

Most real estate investors can’t afford to own multimillion dollar properties. DSTs allow investors to acquire partial ownership in properties that otherwise would be out-of-reach.

Limited Personal Liability

Loans are nonrecourse to the investor. The DST is the sole borrower.

Lower Minimum Investments

DSTs can accommodate much lower minimum investments, whereas 1031 exchange minimums often are $100,000.

Diversification

Investors can divide their investment among multiple DSTs, which may provide for a more diversified real estate portfolio across geography and property types.

Estate Planning

All 1031 exchange investments receive a step-up in cost basis so your heirs will not inherit capital gain liabilities, and provides them with professional real estate management versus the burden of hands-on management.

Insurance Policy

If for some reason the investor can’t acquire the original property they identified, a secondary DST option allows them to meet the exchange deadlines and defer the capital gains tax.

Eliminate Boot

Any remaining profit on the sale of your relinquished property is considered “boot.” This remaining money becomes taxable unless you eliminate it. The excess cash (boot) can be invested in a DST to avoid incurring tax.

Swap Until You Drop

The DST structure allows the investor to continue to exchange real properties over and over again until the investor’s death.

Frequently Asked Questions

What is a 1031 Exchange?

Section 1031 of the Internal Revenue Code provides an alternative strategy for deferring capital gains tax that may arise from the sale of a property. By exchanging a relinquished property for “like-kind” real estate, property owners may defer federal taxes and use all proceeds from the sale for the purchase of replacement property. To determine if a transaction will qualify under Section 1031 depends on the following factors:

  • The nature and use of the relinquished property and the method of its disposition.
  • The use of a qualified intermediary and a qualified exchange escrow and the amount of time between the sale of the relinquished property and the identification and acquisition of the replacement property.

Do vacation and second homes qualify for a 1031 Exchange?

Vacation or second homes held by the exchanger primarily for personal use do not qualify for tax deferred exchange treatment under Section 1031. The safe harbor for a vacation or second home to qualify as relinquished property in a Section 1031 exchange requires the exchanger to have owned the property for twenty-four months immediately before the exchange, and within each of those two twelve-month periods the exchanger must have:

  • Rented the property at fair market rental for fourteen or more days, and
  • Restricted personal use to the greater of fourteen days or 10% of the number of days that it was rented at fair market rental within that twelve-month period.

For these purposes, “personal use” includes use by the exchanger’s friends and family members that do not pay fair market value rent.

How do my heirs benefit from a DST 1031 Exchange investment strategy?

By investing in a DST, heirs may receive any distributions paid from the investments. Upon the sale of the property owned by the DST, each heir can choose what to do with their inherited portion. It is possible that one heir continues to exchange the investment, while another may sell and receive cash proceeds. Should the DST investor pass away, under the current tax laws, the heirs would get a “step-up” in tax basis, bringing the investment up to fair market value, thereby potentially deferring capital gains taxes on the original and subsequent properties.

For More Information

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Important Disclosures

Investments in offerings sponsored by Inland Private Capital Corporation (IPC) involve certain risks including but not limited to tax risks, general real estate risks, risks relating to the financing on the applicable property, if any, risks relating to the ownership and management of the property, risks relating to private offerings and the lack of liquidity, and risks relating to the Delaware statutory trust structure. In addition, IPC can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

Important Risk Factors to Consider

An investment in an IPC-sponsored program is subject to various risks, including but not limited to:

  • No public market currently exists, and one may never exist, for the interests of any IPC-sponsored program. The purchase of interests in any IPC-sponsored program is speculative and is suitable only for persons who have no need for liquidity in their investment and who can afford to lose their entire investment.
  • IPC-sponsored programs offer and sell interests pursuant to exemptions from the registration provisions of federal and state law and, accordingly, those interests are subject to restrictions on transfer.
  • There is no guarantee that the investment objectives of any particular IPC-sponsored program will be achieved.
  • The long-term impact of the COVID-19 pandemic and the resulting global financial, economic and social distress remains uncertain.
  • The actual amount and timing of distributions paid by IPC-sponsored programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital.
  • Investments in real estate are subject to varying degrees of risk, including, among other things, local conditions such as an oversupply of space or reduced demand for properties, an inability to collect rent, vacancies, inflation and other increases in operating costs, adverse changes in laws and regulations applicable to owners of real estate and changing market demographics.
  • IPC-sponsored programs depend on tenants for their revenue, and may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants.
  • IPC-sponsored programs may own single-tenant properties, which may be difficult to re-lease upon tenant defaults or early lease terminations.
  • Continued disruptions in the financial markets and challenging economic conditions could adversely affect the ability of an IPC-sponsored program to secure debt financing on attractive terms and its ability to service that indebtedness.
  • The prior performance of other programs sponsored by IPC should not be used to predict the results of future programs.
  • The acquisition of interests in an IPC-sponsored program may not qualify under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”) for tax-deferred exchange treatment.
  • Certain of the programs previously sponsored by IPC have experienced adverse developments in the past.

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Investments in offerings sponsored by Inland Private Capital Corporation (IPC) involve certain risks including but not limited to tax risks, general real estate risks, risks relating to the financing on the applicable property, if any, risks relating to the ownership and management of the property, risks relating to private offerings and the lack of liquidity, and risks relating to the DST, QOZ and Qualified Opportunity Fund structures. This website is not intended as tax advice

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