Does a DST Investment Follow the Same Timelines and Rules as a Traditional 1031 Exchange?
A Delaware Statutory Trust (DST) is a popular option for investors utilizing a 1031 Exchange to defer capital gains tax while reinvesting in real estate. But does a DST follow the same timelines and IRS rules as a traditional 1031 Exchange?
The short answer is yes—DSTs are considered a like-kind investment, meaning they adhere to the strict IRS regulations, including identification and closing deadlines. Investors must fully understand these timelines to avoid tax penalties and ensure a successful exchange.
This comprehensive guide explores the timing requirements, eligibility rules, and benefits of using a DST in a 1031 Exchange, ensuring you navigate the process with confidence.
What Is a 1031 Exchange?
A 1031 Exchange, as outlined in Section 1031 of the IRS tax code, allows real estate investors to defer capital gains taxes by reinvesting the proceeds from a property sale into a like-kind property.
1031 Exchange Key Timelines
- 45-Day Identification Period: Investors must identify their replacement property (or properties) within 45 days of selling their relinquished property.
- 180-Day Closing Period: The replacement property purchase must be completed within 180 days of the initial sale.
Failing to adhere to these deadlines invalidates the 1031 Exchange, triggering capital gains taxes on the sale.
How Does a DST Work in a 1031 Exchange?
A Delaware Statutory Trust (DST) is a passive real estate investment structure that allows multiple investors to own fractional shares of institutional-quality real estate.
The IRS recognizes DSTs as a like-kind replacement property for 1031 Exchanges, making them an attractive, hands-free option for investors seeking tax deferral, diversification, and passive income.
Benefits of Using a DST in a 1031 Exchange
- No Active Management – The DST sponsor handles all property management.
- Pre-Packaged Investment – Investors can easily close within 1031 deadlines.
- Diversification – Invest in multiple properties and asset types.
- Institutional-Grade Assets – Access large-scale commercial properties usually unavailable to individual investors.
But do DST investments follow the same 1031 Exchange rules? Let's break it down.
Does a DST Follow the Same 1031 Exchange Timelines?
1. 45-Day Identification Rule
Just like a traditional real estate purchase in a 1031 Exchange, DST investors must identify their replacement property within 45 days of selling their original property.
How to Identify a DST Within 45 Days:
- Three-Property Rule – List up to three replacement properties (DSTs included).
- 200% Rule – Identify multiple properties as long as their combined fair market value does not exceed 200% of the relinquished property.
- 95% Rule – Identify an unlimited number of properties, as long as 95% of the total value is acquired.
Pro Tip: Since DST investments are pre-structured, they are easier to identify and secure than traditional real estate, ensuring compliance within the 45-day period.
2. 180-Day Closing Rule
DSTs follow the same 180-day closing period, meaning investors must complete the purchase within 180 days after selling their relinquished property.
Why DSTs Are Ideal for a 180-Day Closing Window:
- Pre-Arranged Deals – DSTs are already structured, allowing fast closings.
- No Need for Financing – Traditional real estate closings may be delayed due to financing, inspections, or negotiations, whereas DSTs offer a streamlined process.
- Instant Diversification – Investors can split proceeds among multiple DSTs, reducing risk.
Warning: If a DST investment isn’t closed within 180 days, the investor will lose their 1031 Exchange benefits and be subject to capital gains taxes.
Other Important 1031 Exchange Rules for DST Investments
3. Same Taxpayer Rule
The entity selling the original property must be the same taxpayer purchasing the DST.
- Example: If John Smith LLC sells a rental home, John Smith LLC must acquire the DST interests.
4. Like-Kind Property Rule
Since the IRS classifies DSTs as real estate, they qualify as like-kind for 1031 Exchanges.
- Example: Selling a rental property and reinvesting in a DST that owns multifamily apartments is eligible.
5. Equal or Greater Value Rule
To fully defer capital gains taxes, investors must reinvest 100% of the proceeds from their sale into one or more DST investments.
Partial Exchanges: If an investor reinvests less than the total sale amount, the remaining portion (boot) is taxable.
Why Investors Choose DSTs for 1031 Exchanges
- Ease of Entry: DSTs allow investors to quickly meet 1031 deadlines without the hassle of managing physical properties.
- Instant Diversification: Instead of reinvesting in one property, DSTs allow fractional ownership in multiple assets.
- Passive Investment: No landlord responsibilities—ideal for retirees and hands-free investors.
- Higher-Quality Assets: Gain access to institutional-grade properties like luxury apartments, medical facilities, and industrial spaces.
Are DSTs the Best 1031 Exchange Option?
Yes, DSTs follow the same 1031 Exchange timelines and offer a streamlined, passive alternative to traditional real estate investments.
Key Takeaways:
✔ DSTs adhere to the 45-day identification and 180-day closing deadlines.
✔ They qualify as like-kind properties, making them IRS-approved for 1031 Exchanges.
✔ Investors benefit from fast closings, diversification, and passive income.
If you're considering a 1031 Exchange and want a hassle-free, tax-deferred investment, a DST could be your best option.
