Strategies / 1031 Exchange

1031 Exchange

Defer capital gains on the sale of investment real estate by reinvesting through institutional-quality Delaware Statutory Trust programs.

What is a 1031 Exchange?

Section 1031 of the Internal Revenue Code allows investors to defer the recognition of capital gains taxes on the sale of investment real estate by reinvesting the proceeds into a like-kind replacement property within a defined timeline.

A 1031 Exchange is one of the most established tax-deferral strategies for real estate investors. It enables continued capital growth while preserving the value that would otherwise be lost to taxes at the time of sale.

§ 1031

Internal Revenue Code

45days

to identify replacement property

180days

to close on replacement property

How a 1031 Exchange works

A 1031 Exchange follows a structured timeline. After the sale of investment real estate, the investor has 45 days to formally identify replacement property and 180 days to close on it. A fully tax-deferred 1031 Exchange generally requires the replacement property to equal or exceed the value of the relinquished property, with all of the equity from the sale reinvested. Debt does not need to be replaced dollar-for-dollar; it can be reduced if offset with additional equity. Cash taken out or equity not fully reinvested may create taxable boot.

IRC § 1031

A structured timeline

45 days to identify. 180 days to close. Tax deferral continues indefinitely.

01 / Property Sale

Day 0

Sale of original investment property. Proceeds are wired directly to a qualified intermediary.

02 / Identify Replacement

Day 45

Deadline to identify replacement property. Several identification rules are available, including the three-property, 200%, and 95% rules.

03 / Close Exchange

Day 180

Deadline to close on the replacement property and complete the exchange.

04 / Continue Deferral

Indefinite

Tax deferral continues until disposition of the replacement property absent a successive 1031 or 721 contribution.

The exchange must be facilitated by a qualified intermediary, who holds the sale proceeds and ensures the transaction meets IRC Section 1031 requirements. Tax deferral continues indefinitely until disposition of the replacement property absent a successive 1031 or 721 exchange, or may be eliminated entirely through a step-up in basis upon the investor's death.

Why Delaware Statutory Trusts

Before 2004, completing a 1031 exchange typically meant identifying, purchasing, and managing replacement property directly. Earlier fractional structures, including Tenant in Common arrangements, broadened access but introduced operational and lender-side complexity that limited scale.

In 2004, the IRS issued Revenue Ruling 2004-86, confirming that beneficial interests in a properly structured Delaware Statutory Trust are treated as direct interests in real property for purposes of Section 1031. The ruling established the legal foundation for the modern institutional DST market.

A DST is a real estate ownership structure that allows investors to hold a fractional interest in institutional-quality real estate. Because DST interests are recognized as eligible 1031 replacement property, investors can defer capital gains while accessing professionally managed real estate without the obligations of direct ownership.

Section 1 of 3

Why investors choose DSTs

Institutional access. Access to institutional-quality real estate that would otherwise be out of reach for most individual investors.

Professional management. Professional asset and property management without the obligations of direct ownership.

Passive ownership. Beneficial interests in the trust without active management responsibilities.

Lower minimums. Lower investment minimums than most direct property ownership.

Diversification. Spread exposure across properties, sectors, or geographies when investing in multiple DSTs.

Certainty of close. DSTs are pre-packaged and available for closing within the strict 1031 timeline.

Institutional financing. Non-recourse financing at institutional pricing terms.

Who 1031 Exchanges are for

1031 Exchanges are most relevant to investors who:

Appreciated real estate. Hold investment real estate they want to sell.

Tax exposure. Face a meaningful capital gains tax or depreciation recapture liability on a sale.

Continued reinvestment. Want to stay invested in real estate without tax leakage.

Hands-off ownership. Prefer passive DST ownership over active management of a replacement property.

Key considerations

Before engaging in a 1031 Exchange, investors should evaluate:

Strict timeline. The 45-day identification and 180-day closing deadlines are strict and unforgiving.

Illiquidity. DST investments are illiquid and typically held for the duration of the program.

Real estate risk. DST investments involve real estate risk and are speculative in nature, including the potential loss of principal.

Suitability. DST investments involve significant risk and are appropriate only for investors who can bear the loss of their entire principal.

Tax law risk. Tax laws may change; current 1031 treatment is not guaranteed indefinitely.

Advisor coordination. 1031 Exchanges are complex transactions that require coordination with qualified tax, legal, and financial advisors.

Sightbridge's Approach

1031 Exchange programs from Sightbridge

Sightbridge is preparing institutional-quality DST programs for the private wealth channel. Each program is designed to meet the standards of underwriting, structure, and service that institutional investors expect.

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