Can You Exchange Out of a DST into Another §1031 Exchange?

One of the most com­mon ques­tions investors ask before com­plet­ing a Delaware Statu­to­ry Trust (DST) invest­ment is whether they are per­ma­nent­ly com­mit­ted to the DST until the prop­er­ty is sold. Many investors wor­ry that by exchang­ing into a DST as part of a Sec­tion 1031 exchange, they may be lim­it­ing their future flex­i­bil­i­ty.

June 18, 2026

By Al DiNi­co­la, AIF®
Pri­vate Fund Advi­sor
DST 1031 Spe­cial­ist
Fidu­cia­ry Cap­i­tal Man­age­ment, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Under­stand­ing How Delaware Statu­to­ry Trust Investors Can Con­tin­ue Tax Defer­ral

Intro­duc­tion

The good news is that, in most cas­es, investors can exchange out of a DST and into anoth­er qual­i­fy­ing §1031 replace­ment prop­er­ty when the DST prop­er­ty is sold. This abil­i­ty allows investors to con­tin­ue defer­ring cap­i­tal gains tax­es while adapt­ing their invest­ment strat­e­gy as mar­ket con­di­tions, income needs, and per­son­al cir­cum­stances change. Over the past few years there has also been an exit strat­e­gy that involves mov­ing into a Sec­tion 721 (UPREIT). We will review this process in anoth­er writ­ing. This move may be an option­al strat­e­gy or required by design.

For many investors, the DST serves not as the final des­ti­na­tion but as one step in a long-term tax-defer­ral strat­e­gy that may span mul­ti­ple prop­er­ties, spon­sors, and invest­ment cycles over many years.

Under­stand­ing how the process works, and plan­ning ahead, is essen­tial for pre­serv­ing the tax ben­e­fits of a §1031 exchange.

The Foundation: DSTs Are Like-Kind Property

The abil­i­ty to exchange out of a DST begins with the fact that the Inter­nal Rev­enue Ser­vice rec­og­nizes ben­e­fi­cial inter­ests in prop­er­ly struc­tured Delaware Statu­to­ry Trusts as qual­i­fy­ing replace­ment prop­er­ty for Sec­tion 1031 exchanges.

This treat­ment was estab­lished through IRS Rev­enue Rul­ing 2004–86, which clar­i­fied that ben­e­fi­cial own­er­ship inter­ests in qual­i­fy­ing DSTs are treat­ed as direct own­er­ship inter­ests in real estate rather than own­er­ship in a busi­ness enti­ty.

Because the DST inter­est is con­sid­ered real prop­er­ty for §1031 pur­pos­es, investors gen­er­al­ly have the same abil­i­ty to exchange out of the DST as they would if they direct­ly owned an apart­ment build­ing, med­ical office, indus­tri­al facil­i­ty, self-stor­age prop­er­ty, or oth­er invest­ment real estate.

In sim­ple terms:

Prop­er­ty A may exchange into a DST and then when sold exchange into Anoth­er DST. Then the investor may exchange into a Direct Prop­er­ty Own­er­ship. Then move into anoth­er DST Again. This may hap­pen over a num­ber of years.

Yes, there may be an ongo­ing chain of tax-deferred exchanges.

What Happens When a DST Property Sells?

DSTs are designed as long-term invest­ments rather than per­pet­u­al hold­ings.

Most DST offer­ings have antic­i­pat­ed hold­ing peri­ods rang­ing from approx­i­mate­ly five to ten years, although actu­al hold­ing peri­ods can be short­er or longer depend­ing on mar­ket con­di­tions and spon­sor deci­sions.

When the spon­sor deter­mines it is appro­pri­ate to sell the prop­er­ty, the DST investors are typ­i­cal­ly noti­fied months in advance. This enables the investor to plan their next move. The investor will receive their pro­por­tion­ate share of the sale pro­ceeds.

At that point, investors gen­er­al­ly have two choic­es:

Option 1: Recognize Taxable Gain

The investor may sim­ply receive the cash pro­ceeds from the sale.

How­ev­er, this typ­i­cal­ly trig­gers:

• Fed­er­al cap­i­tal gains tax­es
• Depre­ci­a­tion recap­ture tax­es
• Poten­tial Net Invest­ment Income Tax (NIIT)
• Applic­a­ble state tax­es

For investors with sub­stan­tial appre­ci­a­tion, this tax lia­bil­i­ty can be sig­nif­i­cant. How­ev­er, direct cash investors in a DST may have more options since they did not enter the DST via a §1031 exchange.

Option 2: Complete Another §1031 Exchange

Instead of receiv­ing tax­able pro­ceeds, investors may elect to per­form anoth­er 1031 exchange.

This allows them to:

• Con­tin­ue defer­ring cap­i­tal gains tax­es
• Pre­serve invest­ment cap­i­tal
• Poten­tial­ly increase future income
• Repo­si­tion into dif­fer­ent prop­er­ty sec­tors
• Adapt to chang­ing invest­ment objec­tives

For many DST investors, this sec­ond option becomes the pre­ferred strat­e­gy.

The Standard §1031 Rules Still Apply

When exchang­ing out of a DST, investors must fol­low the same rules that apply to any oth­er Sec­tion 1031 exchange.

The 45-Day Identification Period

After the DST sale clos­es, investors gen­er­al­ly have 45 cal­en­dar days to iden­ti­fy replace­ment prop­er­ties.

This iden­ti­fi­ca­tion must be:

• Writ­ten
• Signed
• Deliv­ered to the Qual­i­fied Inter­me­di­ary (QI) or oth­er appro­pri­ate par­ty
• Com­plet­ed with­in the IRS dead­line

Fail­ure to iden­ti­fy replace­ment prop­er­ty with­in the required time­frame gen­er­al­ly caus­es the exchange to fail.

The 180-Day Exchange Period

Investors must acquire the replace­ment prop­er­ty with­in 180 cal­en­dar days of the sale of the DST prop­er­ty. This dead­line includes the iden­ti­fi­ca­tion peri­od and can­not be extend­ed except in lim­it­ed cir­cum­stances autho­rized by the IRS. Because these dead­lines are strict, plan­ning before the DST sale often becomes crit­i­cal.

What Can You Exchange Into?

One of the biggest advan­tages of exchang­ing out of a DST is flex­i­bil­i­ty. Investors are not lim­it­ed to pur­chas­ing anoth­er DST. Poten­tial replace­ment options may include:

Another Delaware Statutory Trust

Many investors choose to exchange from one DST into anoth­er.

Ben­e­fits may include:

• Con­tin­ued pas­sive own­er­ship
• Pro­fes­sion­al man­age­ment
• Diver­si­fi­ca­tion oppor­tu­ni­ties
• Access to insti­tu­tion­al-qual­i­ty prop­er­ties
• Sim­pli­fied own­er­ship struc­ture

This option is often attrac­tive for retirees seek­ing pas­sive income.

Direct Real Estate Ownership

Some investors decide to return to active own­er­ship.

Exam­ples include:

• Apart­ment com­plex­es
• Retail cen­ters
• Indus­tri­al build­ings
• Self-stor­age facil­i­ties
• Triple-net leased prop­er­ties
• Com­mer­cial office prop­er­ties

This approach may pro­vide greater con­trol but typ­i­cal­ly requires more man­age­ment respon­si­bil­i­ty.

Tenant-in-Common (TIC) Interests

Cer­tain investors may choose TIC struc­tures as replace­ment prop­er­ty. These arrange­ments pro­vide frac­tion­al own­er­ship while allow­ing more flex­i­bil­i­ty than some DST struc­tures. There may also be draw­backs such as recourse loans an agree­ment between par­ties.

Other Like-Kind Investment Real Estate

Sec­tion 1031 broad­ly defines like-kind real estate. Investors can poten­tial­ly move between numer­ous real estate asset class­es while main­tain­ing tax defer­ral.

Why Planning Ahead Matters

Unlike a typ­i­cal prop­er­ty own­er who con­trols when a prop­er­ty is sold, DST investors gen­er­al­ly do not con­trol the tim­ing of dis­po­si­tion. The spon­sor deter­mines when a prop­er­ty sale occurs based on:

• Mar­ket con­di­tions
• Asset per­for­mance
• Financ­ing con­sid­er­a­tions
• Investor objec­tives
• Strate­gic busi­ness deci­sions

Because of this, investors should remain pre­pared for a future exchange well before the prop­er­ty is list­ed for sale.

Proac­tive plan­ning can help investors:

• Review replace­ment options ear­ly
• Coor­di­nate with tax advi­sors
• Under­stand mar­ket oppor­tu­ni­ties
• Avoid rushed deci­sions
• Improve over­all exchange out­comes

Wait­ing until the sale clos­es can cre­ate unnec­es­sary pres­sure dur­ing the 45-day iden­ti­fi­ca­tion win­dow.

Important Sponsor Considerations

Not all DST offer­ings are iden­ti­cal.

Before invest­ing, investors should review the sponsor’s gov­ern­ing doc­u­ments and offer­ing mate­ri­als care­ful­ly. Key ques­tions may include:

Are There Restrictions on Transfers?

DST inter­ests are gen­er­al­ly illiq­uid invest­ments.

Investors should under­stand:

• Trans­fer lim­i­ta­tions
• Resale restric­tions
• Spon­sor approval require­ments
• Sec­ondary mar­ket avail­abil­i­ty

Although these restric­tions usu­al­ly do not pre­vent a future 1031 exchange fol­low­ing a prop­er­ty sale, they can affect liq­uid­i­ty dur­ing the hold­ing peri­od.

What Is the Expected Hold Period?

Spon­sors often pro­vide esti­mat­ed hold peri­ods.

While esti­mates are not guar­an­tees, they can help investors under­stand poten­tial future exchange time­lines.

What Is the Exit Strategy?

A sponsor’s dis­po­si­tion strat­e­gy may influ­ence:

• Tim­ing of sale
• Poten­tial appre­ci­a­tion
• Future exchange plan­ning
• Rein­vest­ment oppor­tu­ni­ties

Under­stand­ing the sponsor’s phi­los­o­phy can pro­vide valu­able insight into long-term expec­ta­tions.

Working with the Right Professionals

Suc­cess­ful DST-to-DST or DST-to-prop­er­ty exchanges require coor­di­na­tion among mul­ti­ple pro­fes­sion­als.

Qualified Intermediary (QI)

The QI plays a crit­i­cal role in main­tain­ing tax-deferred sta­tus. Exchange funds gen­er­al­ly must be held by the QI and can­not be received direct­ly by the investor.

CPA or Tax Advisor

Tax pro­fes­sion­als can help eval­u­ate:

• Deferred gain amounts
• Depre­ci­a­tion recap­ture expo­sure
• State tax impli­ca­tions
• Estate plan­ning con­sid­er­a­tions
• Future tax strate­gies

Financial Advisor

A knowl­edge­able advi­sor can assist with:

• Asset allo­ca­tion
• Port­fo­lio diver­si­fi­ca­tion
• Income objec­tives
• Risk man­age­ment
• Replace­ment prop­er­ty selec­tion

The ear­li­er these pro­fes­sion­als become involved, the smoother the process typ­i­cal­ly becomes. How­ev­er, engag­ing an advi­sor who has expe­ri­ence and exper­tise is a best prac­tice.

The Potential for Long-Term Tax Deferral

Many investors use a series of §1031 exchanges through­out their invest­ing careers. Rather than trig­ger­ing tax­es after every prop­er­ty sale, they con­tin­u­ous­ly exchange from one invest­ment prop­er­ty to anoth­er. A pos­si­ble sequence might look like:

• Rental prop­er­ty
• DST invest­ment
• Anoth­er DST
• Triple-net leased prop­er­ty
• Mul­ti­fam­i­ly prop­er­ty
• Final DST invest­ment

Each suc­cess­ful exchange may con­tin­ue tax defer­ral while allow­ing the investor to repo­si­tion assets accord­ing to chang­ing goals. Some investors ulti­mate­ly hold exchanged prop­er­ty until death, at which point heirs may receive a step-up in basis under cur­rent tax law, poten­tial­ly elim­i­nat­ing a sub­stan­tial por­tion of deferred cap­i­tal gains. Investors should con­sult their tax and estate plan­ning pro­fes­sion­als regard­ing their spe­cif­ic cir­cum­stances.

Conclusion

A Delaware Statu­to­ry Trust is not nec­es­sar­i­ly a per­ma­nent invest­ment des­ti­na­tion. In most cas­es, investors can exchange out of a DST into anoth­er qual­i­fy­ing §1031 replace­ment prop­er­ty when the DST prop­er­ty is sold. Because DST inter­ests are treat­ed as like-kind real estate under IRS guide­lines, investors can con­tin­ue a chain of tax-deferred exchanges while adapt­ing to chang­ing mar­ket con­di­tions and invest­ment objec­tives.

The key is prepa­ra­tion. Under­stand­ing spon­sor time­lines, coor­di­nat­ing with a Qual­i­fied Inter­me­di­ary, con­sult­ing tax pro­fes­sion­als, and eval­u­at­ing replace­ment options before the sale occurs can help investors pre­serve tax defer­ral and main­tain flex­i­bil­i­ty for future invest­ment deci­sions.

For many investors, a DST is not the end of the §1031 jour­ney, it is sim­ply anoth­er chap­ter in a long-term wealth preser­va­tion and tax-defer­ral strat­e­gy.

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@Fiduciarycm.com.

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