How 1031 Exchanges Work with DSTs: Smooth Exchange Execution

Jan­u­ary is over and as an investor you may be look­ing at the invest­ment goals you made for 2026. One of those goals may have been to restruc­ture your real estate invest­ments and poten­tial­ly sell the prop­er­ty.

Feb­ru­ary 1, 2026

By Al DiNi­co­la, AIF®
Adinicola@namcoa.com
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Every year we inter­act with investors and CPAs to clar­i­fy the smoothest uti­liza­tion of a Delaware Statu­to­ry Trust (DST) in a tax deferred exchange.

Exe­cut­ing a §1031 exchange can be one of the most stress­ful moments and time-sen­si­tive activ­i­ty in a real estate investor’s jour­ney. The rea­son may be the strict IRS dead­lines. Cou­ple that with poten­tial­ly lim­it­ed replace­ment prop­er­ty inven­to­ry and investors need­ing to replace debt (aka financ­ing delays), and pile on the nego­ti­a­tion risks often com­pli­cate the process. For this rea­son, many investors are turn­ing to Delaware Statu­to­ry Trusts (DSTs) to help ensure a smooth and effi­cient §1031 exchange exe­cu­tion.

This guide explains how 1031 exchanges work with DSTs, why DSTs qual­i­fy as replace­ment prop­er­ty, and how they sim­pli­fy the exchange process. Every year we edu­cate investors (and some­times their CPAs) on the prop­er struc­ture of the exchange. 

What Is a 1031 Exchange?

A §1031 tax deferred exchange allows real estate investors to defer cap­i­tal gains tax­es by rein­vest­ing pro­ceeds from the sale of invest­ment or busi­ness-use prop­er­ty into like-kind real estate. These exchanges are gov­erned by the Inter­nal Rev­enue Ser­vice and require strict adher­ence to pro­ce­dur­al rules.

These pro­ce­dur­al rules can­not be over­stat­ed and must be fol­lowed. Investors must use the ser­vices of a qual­i­fied inter­me­di­ary or QI. Investors need to have an agree­ment with the QI pri­or to the clos­ing of the prop­er­ty that they are sell­ing. The tim­ing that was ref­er­enced refers to two impor­tant dead­lines after the clos­ing of the relin­quished prop­er­ty. The first dead­line is 45 days after the relin­quished prop­er­ty is closed. The investor needs to iden­ti­fy poten­tial replace­ment prop­er­ties that they may close on. Clos­ing one or more of the prop­er­ties on the 45-day iden­ti­fi­ca­tion list must take place with­in a total of 180-day of the clos­ing of the relin­quished prop­er­ties. This is 135 days after the expi­ra­tion of the 45-day iden­ti­fi­ca­tion time peri­od. This cal­cu­la­tion is often over­looked. Some may antic­i­pate they have 180 days after the 45 days. Miss­ing any of these dates can result in the exchange being dis­qual­i­fied.

Why Delaware Statu­to­ry Trusts Qual­i­fy for 1031 Exchanges

A Delaware Statu­to­ry Trust (DST) is a legal struc­ture that allows mul­ti­ple investors to own frac­tion­al inter­ests in insti­tu­tion­al-qual­i­ty real estate. The abil­i­ty to use a DST as a replace­ment prop­er­ty was approved in a let­ter rul­ing from and by the IRS in 2004. Over the past 22 years DST options have become avail­able as replace­ment prop­er­ties. From a tax per­spec­tive, DST investors are treat­ed as own­ing direct inter­ests in real prop­er­ty, not shares in a com­pa­ny.

Because of this struc­ture, DSTs qual­i­fy as 1031 replace­ment prop­er­ty, mak­ing them a pow­er­ful tool for cer­tain investors seek­ing speed, cer­tain­ty, and com­pli­ance. In inter­views with investors, we review suit­abil­i­ty items for investors seek­ing to do a 1031 exchange as well as doing an exchange that involves a DST. DSTs are not for all investors

How a 1031 Exchange Works with DSTs (Step-by-Step)

One of the first items the investor needs to decide is whether it is time to sell the invest­ment prop­er­ty. Years may go by and investors may rethink hold­ing or sell­ing and mak­ing a res­o­lu­tion year after year to sell their prop­er­ty that they’ve held for an extend­ed peri­od of time.

So, you have decid­ed to Sell the invest­ment prop­er­ty. This is known as the Relin­quished Prop­er­ty

The process begins when an investor sells an invest­ment prop­er­ty. Sale pro­ceeds are trans­ferred direct­ly to a Qual­i­fied Inter­me­di­ary, ensur­ing the investor does not take con­struc­tive receipt of the funds. Con­struc­tive receipt may be an elu­sive term for some investors. If the title com­pa­ny is hold­ing the investors cash pro­ceeds in their escrow account that is con­sid­ered con­struc­tive receipt. Any amount that does not get sent to the QI will be con­sid­ered tax­able. This is con­sid­ered boot.

The clock starts to Tick

So, what hap­pens dur­ing the 45-day peri­od. The QI will pro­vide a form for the investor to fill out that enables them to iden­ti­fy prop­er­ties dur­ing the 45 days. Investors may place a prop­er­ty on the 45-day list, attempt to nego­ti­ate on that prop­er­ty, and then decide either to retain that prop­er­ty on the list or replace it with oth­er prop­er­ties. This is where the smooth tran­si­tion or smooth exe­cu­tion of uti­liz­ing DST offer­ings may help investors. Investors need a spe­cial­ist since real estate bro­kers and agents typ­i­cal­ly do not have the cre­den­tials to han­dle DSTs. Investors may use DST’s as either a pri­ma­ry replace­ment prop­er­ty or a back­up replace­ment prop­er­ty. In addi­tion, DST’s may be uti­lized to han­dle any cash press pro­ceeds OK a boot to avoid pay­ing cap­i­tal gains on that amount of pro­ceeds not used when buy­ing a tra­di­tion­al piece of real estate. DSTs are prepack­aged and if an investor needs to replace debt non-recourse debt may be assigned based on the per­cent­age of cash being invest­ed by the investor to sat­is­fy one of the require­ments of his suc­cess­ful 1031 exchange. Investors have the abil­i­ty to diver­si­fy across geo­graph­ic mar­kets and states as well as dif­fer­ent asset class­es. DSTs also have the abil­i­ty to match the exchange pro­ceeds pre­cise­ly down to the pen­ny of cash that the investor is required to uti­lize to sat­is­fy the oth­er com­po­nent of the 1031 exchange which is to uti­lize all the cash. DST offer­ings are typ­i­cal­ly pre-struc­tured and ready to accept cap­i­tal, which sig­nif­i­cant­ly reduces iden­ti­fi­ca­tion risk.

Match Equi­ty and Debt Require­ments

DSTs allow investors to replace both equi­ty and debt, which is essen­tial for full tax defer­ral. This flex­i­bil­i­ty helps avoid com­mon 1031 mis­takes such as under-invest­ing or over­lever­ag­ing.

Close the Exchange With­in 180 Days

Once DSTs are select­ed, the Qual­i­fied Inter­me­di­ary trans­fers exchange funds direct­ly into the DST(s). Because financ­ing, inspec­tions, and man­age­ment are already in place, DST clos­ings are gen­er­al­ly faster and more pre­dictable than tra­di­tion­al prop­er­ty pur­chas­es.

Why DSTs Enable Smooth 1031 Exchange Exe­cu­tion

Using DSTs in a 1031 exchange helps investors over­come many com­mon chal­lenges, includ­ing the tight IRS dead­lines. Depend­ing on the spe­cif­ic mar­kets there may be lim­it­ed replace­ment prop­er­ty inven­to­ry. If the investor does not want to bring addi­tion­al cash to the replace­ment acqui­si­tion debt needs to be replaced. There may be financ­ing and appraisal delays. One of the pri­ma­ry rea­sons to use a DST would be to avoid the ongo­ing land­lord respon­si­bil­i­ties

Key ben­e­fits of DSTs include:

• Pas­sive real estate own­er­ship
• Access to insti­tu­tion­al-grade assets
• Diver­si­fi­ca­tion across mul­ti­ple mar­kets
• Pre­dictable time­lines and sim­pli­fied exe­cu­tion

Who Should Con­sid­er a DST 1031 Exchange Strat­e­gy?

DSTs are com­mon­ly used by:

• Retir­ing land­lords tran­si­tion­ing to pas­sive income
• Investors sell­ing high­ly appre­ci­at­ed real estate
• Indi­vid­u­als seek­ing diver­si­fi­ca­tion after a sin­gle-prop­er­ty sale
• Investors pri­or­i­tiz­ing sim­plic­i­ty and tax effi­cien­cy

While DSTs are not appro­pri­ate for every investor, they are often ide­al when smooth exchange exe­cu­tion is a top pri­or­i­ty.

Final Thoughts

A 1031 exchange with Delaware Statu­to­ry Trusts can trans­form a high-pres­sure tax event into a stream­lined invest­ment strat­e­gy. By com­bin­ing IRS com­pli­ance with pas­sive own­er­ship and diver­si­fi­ca­tion, DSTs help investors exe­cute exchanges efficiently—without sac­ri­fic­ing income or peace of mind.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC, 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035.  MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.