1031 Exchange Investment Strategies

A 1031 exchange is a tax-deferral strategy under IRS Section 1031. It allows real estate investors to sell an investment property and reinvest the proceeds into a new "like-kind" property — without paying capital gains taxes at the time of the sale. The taxes are deferred until the replacement property is eventually sold. This strategy is widely used by real estate investors to preserve capital and continue growing their portfolios.

A Delaware Statutory Trust (DST) is a legal entity that holds title to real estate. Investors purchase fractional ownership shares in the DST, which qualifies as like-kind property for 1031 exchange purposes. DSTs are managed by institutional sponsors, making them a fully passive investment for the individual investor. Common DST property types include multifamily apartments, industrial warehouses, medical offices, and net-leased retail properties.

A 721 exchange (also known as an UPREIT transaction) allows an investor to contribute property or DST shares into an Operating Partnership in exchange for units in a Real Estate Investment Trust (REIT). This exchange is tax-deferred under IRC Section 721 and provides investors with access to a more diversified, liquid portfolio. The 721 exchange also preserves the step-up in basis at death, which can eliminate deferred capital gains taxes for heirs.

Yes. The IRS classifies mineral rights and oil & gas royalties as real property. This means they are "like-kind" to traditional real estate and can be used as replacement property in a 1031 exchange. Mineral rights and royalties also offer investors diversification outside of traditional real estate, along with a 15% tax depletion allowance that shelters a portion of royalty income from taxes.

Most DST offerings have a minimum investment of $100,000, though this can vary by sponsor and property. One of the advantages of DST investing is that the investment amount can be customized to fit the exact proceeds from your 1031 exchange. Baker 1031 Investments works with investors to find DSTs that match their specific exchange amount and investment goals.

Yes. DST investments are private placement securities offered under Regulation D and are available only to accredited investors. An accredited investor generally must have a net worth of $1 million or more (excluding their primary residence) or annual income of $200,000 or more ($300,000 jointly with a spouse) for each of the two most recent years.

One of the key advantages of DST investments is the speed of closing. Many DSTs can close escrow in as few as 1 to 3 business days, which is critical for investors facing 1031 exchange deadlines. This is significantly faster than purchasing a traditional investment property, which often takes 30 to 60 days or more.

DST investments carry risks including illiquidity, potential loss of principal, vacancy risk, interest rate risk, and general real estate market risk. DST investors also have limited control over the management of the property. As with any investment, past performance does not guarantee future results. Investors should review the Private Placement Memorandum (PPM) carefully and consult with their tax and legal advisors before investing.

DST properties span many commercial real estate asset classes. Common property types include multifamily apartment communities, industrial warehouses, medical office buildings, self-storage facilities, net-leased retail properties, and senior living communities. Many DSTs hold properties leased to nationally recognized tenants on long-term leases, which is intended to provide stable and predictable income.

In a 1031 exchange, you have 45 calendar days from the sale of your relinquished property to identify potential replacement properties. You must also close on the replacement property within 180 days of the sale. These deadlines are strict and cannot be extended — even if the 45th or 180th day falls on a weekend or holiday. DSTs are a popular replacement property option because they can typically close in 1 to 3 days, well within the 180-day window.

When the DST sponsor sells the underlying property, the sale proceeds are distributed to all DST investors based on their ownership share. At that point, investors typically have three options: complete another 1031 exchange into a new replacement property to continue deferring taxes, take the cash and pay capital gains taxes, or — if the DST has a 721 exchange option — contribute their interest into a REIT on a tax-deferred basis.

Yes. Many investors split their 1031 exchange proceeds across multiple DST offerings to achieve greater diversification. For example, an investor might allocate funds across a multifamily DST, an industrial DST, and a medical office DST. This approach spreads risk across different property types, geographic markets, and sponsors — which is one of the key advantages of DST investing.