DST 1031 Exchange Eligibility & Qualifications
DST 1031 eligibility comes in two layers. The first is whether you qualify as an accredited investor under SEC rules. The second is whether your property and your planned exchange qualify under IRS rules. Both layers have to clear before a DST 1031 is on the table for you.
The Two Layers of DST 1031 Eligibility
Some sites collapse “eligibility” into one question. It’s actually two, governed by different rules and different agencies, and you need to clear both.
- Layer 1: Investor eligibility (SEC rules). DST 1031 offerings are private placements under SEC Regulation D Rule 506(c). They can only be sold to accredited investors. The SEC defines who counts as accredited.
- Layer 2: Exchange eligibility (IRS rules). To use the proceeds of a property sale to acquire a DST and defer the tax, the sale and the replacement have to satisfy Section 1031 of the Internal Revenue Code. The IRS defines what kinds of property qualify and what kinds of exchanges work.
The two layers are independent. You can be an accredited investor whose property doesn’t qualify for 1031 treatment. You can have a perfectly qualifying 1031 exchange but not be an accredited investor. Both checks have to clear before a DST 1031 is on the table for you. The rest of this page covers each in detail.
Are You an Accredited Investor?
The SEC defines an accredited investor in Rule 501(a) of Regulation D. The definition is what determines whether you can legally invest in private placements like DST 1031 offerings, hedge funds, and venture capital. The current rules (updated by the SEC in August 2020) recognize three primary paths to accreditation for individuals:
Path 1: Income Test
You qualify if you have annual income above $200,000 individually, or $300,000 jointly with your spouse or spousal equivalent, in each of the two most recent calendar years, and have a reasonable expectation of reaching the same income level in the current year.
This is the most common qualification path for working professionals, business owners, and high-earning W-2 employees.
Path 2: Net Worth Test
You qualify if your individual net worth (or joint net worth with your spouse or spousal equivalent) exceeds $1 million, excluding the value of your primary residence.
This is the most common qualification path for retirees, real estate investors, and anyone whose wealth is held in assets rather than current income. The exclusion of primary residence equity matters: if your home equity puts you over the line but your other assets don’t, you don’t qualify.
Path 3: Professional Certification
Added in 2020, this path qualifies individuals who hold certain professional credentials in good standing, regardless of income or net worth. The current credentials are FINRA Series 7, Series 65, and Series 82 licenses. This makes most licensed financial advisors automatically accredited.
Other paths (“knowledgeable employees” of private funds, certain entity structures) exist but are less commonly relevant for individual property owners doing 1031 exchanges.
Spousal Equivalent Definition
The SEC’s definition of “spousal equivalent” includes a long-term cohabitating partner who would be considered a spouse equivalent under state law. This expanded definition means that domestic partners and committed cohabitants can use joint income or joint net worth to qualify, even without a legal marriage.
How Accreditation Gets Verified
Under Rule 506(c), sponsors and broker-dealers must take reasonable steps to verify accredited investor status before accepting a subscription. Verification typically requires one of the following:
- Tax returns or W-2s for the most recent two years (income test).
- Bank statements, brokerage statements, or third-party appraisals (net worth test).
- A letter from your CPA, attorney, registered investment adviser, or licensed broker-dealer attesting to your accredited status.
- FINRA registration verification (professional certification path).
Most clients use the CPA or attorney letter route because it avoids handing tax returns directly to the sponsor. Our advisors can walk you through the verification options when you’re ready to subscribe.
Does Your Exchange Qualify Under Section 1031?
Even if you’re an accredited investor, your sale and replacement still have to satisfy IRS rules to defer the tax. Five questions cover most of the qualification work.
Question 1: Is the relinquished property held for investment or business use?
Section 1031 applies to real property held for productive use in a trade or business or for investment. It does not apply to:
- Your primary residence.
- A second home or vacation property used primarily personally (a vacation home with documented rental use can qualify under safe-harbor rules in Rev. Proc. 2008-16, but it requires careful documentation).
- Property held primarily for sale (so-called “dealer property,” including most flips).
- REIT shares, partnership interests, LLC interests, or other securities (the underlying real estate doesn’t make these eligible).
If your property is a rental, a commercial building, raw land held for investment, or another investment-purpose real estate asset, you generally clear this question.
Question 2: Is the same taxpayer doing the sale and the purchase?
The taxpayer who sells the relinquished property must be the taxpayer who acquires the replacement property. If your rental is held in your individual name, you must acquire the DST in your individual name. If it’s held in an LLC, the LLC must acquire the DST. If it’s held in a revocable living trust, the trust acquires.
The same-taxpayer rule has narrow exceptions for certain disregarded entities (single-member LLCs, grantor trusts), but the general rule is straightforward: same name on both sides of the exchange.
Question 3: Is the replacement property like-kind real estate?
Like-kind for real estate is broader than most people assume. The IRS treats most investment-purpose real property as like-kind to most other investment-purpose real property. A single-family rental is like-kind to a multifamily DST. A commercial office building is like-kind to a self-storage DST. Raw land is like-kind to a medical office DST.
DST beneficial interests qualify as like-kind real estate under Revenue Ruling 2004-86, which is the legal foundation that makes a DST 1031 exchange possible.
Question 4: Will the replacement be of equal or greater value and debt?
To fully defer the tax, the replacement property’s total value (and its debt) must equal or exceed the relinquished property’s value and debt. Any shortfall (in value or in debt) creates “boot,” which is taxable in the year of sale.
This is one of the most common reasons partial deferral happens: an investor takes some cash off the table, or moves to a lower-debt replacement. Both create taxable boot. Our advisors model the deferral against your specific numbers before subscription.
Question 5: Will the timeline work?
Two hard deadlines apply, both starting the day your sale closes:
- 45-day rule. Replacement property must be identified in writing to a qualified intermediary within 45 calendar days of closing.
- 180-day rule. Replacement property must be acquired (closed) within 180 calendar days of closing, or by the due date of your tax return for the year of sale (whichever comes first).
These deadlines are statutory and inflexible. Missing either one disqualifies the exchange and triggers the deferred tax. DST 1031 properties are popular partly because they’re pre-packaged: investors can typically close within days of identification, which is invaluable when the 45-day window is closing fast.
When a DST 1031 Fits Your Situation
Eligibility is a yes/no question. Fit is a different question. Even when both eligibility layers clear, a DST 1031 may or may not be the right answer for your specific situation. The patterns below describe when a DST tends to make sense.
- You’re an accredited investor and you’ve confirmed it (or you’re confident you can document it).
- Your relinquished property is held for investment or business use, in a structure that allows the same-taxpayer rule to be met.
- You’ve sold or are about to sell the property, with realistic timing for the 45-day and 180-day deadlines.
- Your gain is meaningful relative to the all-in load on a DST. If your gain is modest, the after-fee benefit may not justify the lock-up.
- You want to stay invested in real estate but don’t want to be an active operator anymore.
- You have replacement debt requirements that match what DST sponsors typically arrange (40 to 60 percent loan-to-value).
If most of those describe you, a DST 1031 is worth a serious look. If they don’t, the alternatives section below covers what else might fit.
Alternatives if You're Not Eligible
If one or both eligibility layers don’t clear for you, that doesn’t mean you have no options. It just means a DST 1031 isn’t the right tool. Three common alternatives, depending on which eligibility layer doesn’t clear.
If you’re not an accredited investor
DST 1031 offerings are restricted to accredited investors by federal securities law. There’s no workaround for that, and our team cannot legally accept your subscription if you don’t qualify. But a 1031 exchange itself does not require accreditation. Your alternatives include:
- Direct replacement property: Buy a single replacement property outright. Same 1031 deferral, no DST.
- Tenant-in-common (TIC) structures: Some TIC offerings are available to non-accredited investors, though most are still 506(c) and require accreditation.
- Publicly traded REIT shares: Not a 1031 vehicle, but if you’re willing to pay the tax, REITs offer passive real estate exposure with no accreditation requirement.
If your property doesn’t qualify for 1031 treatment
If your property is a primary residence, a vacation home without documented rental use, or property held primarily for sale, Section 1031 doesn’t apply. Your alternatives:
- Section 121 exclusion: For primary residences, the IRS allows up to $250,000 (single) or $500,000 (married filing jointly) of gain to be excluded from tax if you’ve lived in the home as your primary residence for 2 of the last 5 years.
- Opportunity Zone fund: Defer capital gains from any source (not just real estate) by investing the gain into a Qualified Opportunity Fund within 180 days. Different rules from 1031, different timeline, different long-term outcome.
- Installment sale: Spread the gain over multiple years using seller financing.
If the timeline doesn’t work
If your sale already closed and you’re past the 45-day or 180-day rules, the 1031 exchange is no longer available for that sale. The deferred tax is owed. Going forward, you can plan a future sale around the timeline more carefully, or use one of the alternatives above for current-year proceeds.
Other Tax-Mitigation Strategies
A 1031 exchange is one tool. It’s the right tool for many property owners selling investment real estate, but it isn’t the only way to manage a tax bill. Some clients have additional tax exposure beyond the gain on a single property sale, or a 1031 exchange isn’t the right fit for their situation but they still want to reduce what they owe.
When that’s the case, our team coordinates with tax-strategy specialists who help clients evaluate other mitigation tools. Depending on your situation, the alternatives we’ll often look at together include:
- 831(b) captive insurance: A small-captive insurance structure that lets a business owner deduct premiums while building reserves for genuine risk exposure. Best suited for business owners with predictable, insurable risks and a long-term planning horizon.
- Charitable giving strategies: Including charitable remainder trusts (CRTs), charitable lead trusts (CLATs), donor-advised funds, and other structures that combine a charitable gift with income or estate-tax benefits. Useful when a client has a genuine philanthropic intent alongside the tax planning.
- High-income tax planning: Coordinated income smoothing, retirement-account contributions, and timing strategies for clients in the top federal bracket. Usually run alongside a CPA who has the full picture of the client’s tax position.
- Bonus depreciation through cost segregation: A study that identifies portions of a real estate asset that qualify for accelerated depreciation, allowing larger deductions in the early years of ownership. Most relevant for clients who continue to own direct real estate alongside any DST allocation.
- Strategic loss offsets: Tax-loss harvesting and gain-loss matching across an investor’s broader portfolio to reduce the net taxable gain in a given year.
We don’t implement these strategies directly. The right specialist does, alongside your CPA and attorney. What our team does is coordinate the conversation: identifying which strategies might fit your situation, introducing you to the specialists we work with, and helping you think through how each option compares to (or combines with) a 1031 exchange. The first conversation is the same 20-minute call we’d have about a DST.