How to Use 1031 Exchange into DSTs for Real Estate Retirement Income

 

English Alt Text: A four-panel comic titled “How to Use 1031 Exchange into DSTs for Real Estate Retirement Income.” Panel 1 shows a property owner saying, “I’m tired of managing tenants but don’t want to pay capital gains tax!” Panel 2 features a financial advisor replying, “Try a 1031 exchange into a DST—passive income, no tax hit!” Panel 3 shows the owner reading a list labeled “45 Days, 180 Days,” while the advisor says, “Follow strict IRS deadlines to qualify.” Panel 4 shows the owner smiling with a “Monthly Income” check, saying, “Now I enjoy hands-free income in retirement.”

How to Use 1031 Exchange into DSTs for Real Estate Retirement Income

Many real estate investors hit retirement with valuable properties—but managing tenants, repairs, and active operations gets tiring.

If you're looking for a hands-off way to transition your real estate equity into passive income—without triggering capital gains tax—a 1031 exchange into a Delaware Statutory Trust (DST) might be the solution.

This guide explains how DSTs work, how to use them in a 1031 exchange, and how they can support your retirement income goals.

📌 Table of Contents

What Is a Delaware Statutory Trust (DST)?

A DST is a legal entity that holds title to real estate investments on behalf of multiple investors.

It allows you to invest passively in institutional-grade properties such as apartment complexes, retail centers, industrial facilities, or medical offices.

Investors own a beneficial interest in the trust, not the property directly—making it eligible for 1031 exchange treatment under IRS Revenue Ruling 2004-86.

How 1031 Exchange into DST Works

Using a 1031 exchange, you can sell your existing property and reinvest the proceeds into one or more DSTs—deferring capital gains tax in the process.

Here’s the basic process:

✔️ Sell a rental or investment property

✔️ Engage a Qualified Intermediary (QI) to hold the proceeds

✔️ Identify DST(s) within 45 days

✔️ Close the DST purchase within 180 days

Benefits of DSTs for Retirement Income

✔️ Monthly passive income with no landlord duties

✔️ Access to professionally managed, diversified properties

✔️ Reduced risk through fractional ownership

✔️ Continued tax deferral, step-up in basis for heirs at death

✔️ Investment minimums as low as $25,000 to $100,000

Key Rules and 1031 Requirements

⚠️ 45-day identification rule: You must formally identify DSTs within 45 days of selling your property

⚠️ 180-day closing rule: You must complete the exchange within 180 days

⚠️ “Like-kind” requirement: Real property into real property (DSTs qualify)

⚠️ Reinvest equal or greater value to defer 100% of taxes

Risks and Considerations

✘ DSTs are illiquid—expect to stay invested for 5–10 years

✘ No control over property management decisions

✘ Income may fluctuate based on tenant performance

✘ Limited ability to write off depreciation after 2017 tax changes

🔗 Related Real Estate and Retirement Resources

— How to handle depreciation inside DSTs post-TCJA.

— Farm syndications as an alternative DST option.

— Blending DSTs with income-focused products.

— Understand key differences and how to use both.

— Pass DST interests efficiently to heirs.



Keywords: 1031 exchange, DST, real estate retirement income, passive real estate investing, tax-deferred exchange