A Practical Decision Framework for Investors and Business Owners

Real estate investors often reach a crossroads when selling appreciated property. Is a DST the Right 1031 Exchange Strategy?

I. The Foundation: IRC §1031 Requirements

A 1031 exchange is authorized under Internal Revenue Code §1031(a)(1), allowing the deferral of capital gains taxes

when "like-kind" investment property is exchanged. To remain valid, the exchange must follow:

Timing: Treas. Reg. §1.1031(k)-1 — 45-day identification and 180-day closing.

Same-Taxpayer Rule: The selling entity must be the exact same entity that buys.

Full Reinvestment: All net proceeds must be used; debt must be replaced at equal or greater value.

II. The Risk of "Boot"

Boot is any non-like-kind property received (cash or debt relief). It is taxable and can invalidate the tax-free status of

the exchange. Common causes include:

Direct distribution of sale proceeds to owners.

Reduction in debt on the replacement property without offsetting cash equity.

In multi-owner entities (especially S-Corps), a single shareholder taking cash.

III. Ownership Structure & DST Viability

Individual or Single-Member LLC: Cleanest path; same taxpayer reinvests. DST is fully viable.

Partnership / Multi-Member LLC: Possible to "drop and swap" (separating interests) if done well before the sale.

Often viable with advanced planning.

S-Corporation: Most restrictive. The corporation is the taxpayer; shareholders cannot easily split paths. If one person

wants out, it can create "boot" for the entire group.

IV. Heirs & The Step-Up in Basis

Under IRC §1014, heirs typically receive a Step-Up in Basis to fair market value upon the owner's death, potentially

eliminating the deferred capital gains tax. A DST aligns perfectly with this "Swap 'til you Drop" strategy, providing

passive income for the senior owner while preserving the step-up benefit for heirs.

Disclaimer: This material is for educational purposes only and is not intended as legal, tax, or accounting advice. Internal Revenue Code sections and

Treasury Regulations are subject to change. Consult qualified legal and tax professionals before acting on any 1031 or DST strategies.