1031 Exchange Strategies for Tax-Smart Real Estate Investors
High-net-worth investors often look for tax-smart ways to sell real estate. A 1031 exchange may provide a path to defer taxes, preserve equity, and transition into passive investments such as Delaware Statutory Trusts.
Author: Tom Bowman, CFA CFP®
Last Edited: September 17, 2025
What Is a 1031 Exchange?
A 1031 Exchange is a tax-deferral strategy that allows real estate investors to sell investment property and reinvest the proceeds into another like-kind property, while deferring capital gains taxes.
Investors often search for ways to:
Avoid immediate taxes when selling rental property
Preserve more equity for reinvestment
Defer capital gains and depreciation recapture
Under IRS Section 1031, when structured properly, this exchange can help investors manage their tax exposure and reposition real estate holdings without triggering an immediate tax bill.
Why Consider a 1031 Exchange?
Defer Capital Gains Taxes: Keep more money working for you rather than paying a large tax bill now.
Portfolio Repositioning: Move from active management (like residential rentals) into properties that may be more passive.
Estate Planning: Heirs may benefit from a potential step-up in basis at death, which can reduce tax liability.
Diversification: Exchange into different property types or geographies.
Tax-Smart Ways to Sell Property
Selling a rental property outright often means:
- Capital gains tax on appreciation
- Depreciation recapture at 25%
- Potential state taxes
A 1031 exchange allows you to:
- Defer these taxes (not eliminate)
- Roll equity forward into new investment opportunities
- Rebalance your portfolio while keeping tax efficiency in mind
Delaware Statutory Trusts (DSTs)
A Delaware Statutory Trust (DST) is a structure that allows multiple investors to own fractional interests in institutional-quality real estate. DSTs can be used as replacement property in a 1031 exchange, providing a potential solution for investors who:
No longer want the burden of active property management
Need to identify replacement property quickly (within IRS timelines)
Want to diversify into larger-scale properties (commercial, multifamily, industrial) they couldn’t access individually
Key features of DSTs:
Passive ownership — no day-to-day landlord responsibilities
Qualifies as replacement property for 1031 exchanges (when structured correctly)
Professional management of the underlying real estate
Illiquid and long-term in nature — not suited for all investors
Deadlines & Requirements for 1031 Exchanges
45 Days to identify potential replacement properties
180 Days to close on the new property
Must reinvest the full proceeds and maintain equal or greater debt
Must use a Qualified Intermediary (QI) to facilitate the exchange
Failure to follow these rules can result in immediate taxation.
Risks and Considerations
While 1031 exchanges and DSTs provide tax deferral opportunities, they also carry risks:
Tax deferral does not equal tax elimination — taxes may be due if you sell later without another exchange.
DSTs are illiquid and can involve real estate market risks.
Exchanges must follow strict deadlines and compliance steps.
Suitability depends on your overall tax and estate plan.
Who This Is For
These strategies are most relevant for investors who:
Own rental or investment property with significant appreciation
Want to defer taxes on a property sale
Are looking for passive real estate options like DSTs
Have long-term investment horizons and can handle illiquidity
Work With a Fiduciary Advisor
At Investors Portfolio Services, we help wealthy investors evaluate:
Whether a 1031 exchange fits their broader financial plan
The role of DSTs in tax-smart real estate transitions
Alternatives for liquidity, diversification, and estate planning
Disclosures
This material is for educational purposes only and does not constitute investment or tax advice. Investors should consult with their qualified tax advisor and attorney before pursuing a 1031 exchange. Advisory services offered through Investors Portfolio Services, LLC, an SEC-registered investment advisor. Real estate investing involves risks, including market risk, illiquidity, and potential loss of principal.