Can You 1031 Exchange Your Second Home or Vacation Property Into a Delaware Statutory Trust (DST)?

Owning a second home can be both emotional and financial: it may serve as a retreat, a family gathering place, and a meaningful part of your long-term wealth. But when it comes time to sell, many owners are surprised by how large the capital gains tax bill can be—especially if the property has appreciated significantly.

Some investors explore using a 1031 exchange into a Delaware Statutory Trust (DST) to defer taxes and shift into passive income-producing real estate.

But the key questions are:

• Can a second home actually qualify for a 1031 exchange?
• When do DSTs make sense as the replacement property?
• How does this fit into your broader financial, tax, and estate plan?

This article breaks down those issues in plain language so you can make an informed decision before moving forward.

1. Quick Refresher: How a 1031 Exchange Works

A 1031 exchange allows you to defer capital gains tax when selling one investment or business property and reinvesting into another “like-kind” property.

Key rules:

• Both properties must be held for investment or business use, not personal enjoyment.
• You have 45 days to identify replacement properties.
• You must close within 180 days.
• A Qualified Intermediary (QI) must hold the proceeds; you cannot take possession.

Traditional exchanges typically involve going from one directly owned property to another, which can be challenging when:

• The market is competitive
• Timing is tight
• You no longer want landlord responsibilities

This is why DSTs are often used as the replacement option. 

2. What Is a Delaware Statutory Trust (DST)?

A DST is a legal structure allowing multiple investors to own fractional interests in large, institutional-quality real estate.

Key features:

• You own an interest in the trust—not the property directly
• Properties may include apartments, medical offices, industrial, or retail assets
• A professional sponsor manages all operations
• DSTs generally qualify as like-kind replacement property for 1031 exchanges

The DST structure gives investors access to passive, professionally managed real estate without the operational responsibilities of direct ownership.

3. Can a Second Home Qualify for a 1031 Exchange?

This is the most important question—and the answer depends on use and intent.

A second home used primarily for personal enjoyment generally does not qualify.

However, a second home may qualify if:

• It has been rented at fair market rates for meaningful periods
• It produces rental income
• Personal use is limited
• The owner can demonstrate investment intent through records, advertising, and management activity

The IRS looks closely at the balance between personal use and rental activity. A home that functions as a true investment property, even if used occasionally, may qualify.

A true vacation home with limited rental history typically will not.

4. Why Some Owners Use DSTs as the Replacement Property

If your second home qualifies for a 1031 exchange, your next decision is choosing the replacement investment.

DSTs can be attractive for several reasons:

No active management

No tenants, no maintenance issues, no need to oversee contractors or leasing.

Access to institutional real estate

DSTs invest in larger properties typically unavailable to individual investors.

Diversification

Proceeds can often be allocated across multiple DSTs—different geographies, sectors, and tenant bases.

Easier 1031 timing

DSTs are usually “ready to close,” which can help meet strict exchange deadlines.

Estate planning benefits

Fractional interests may be easier to incorporate into trusts or transfer to heirs.

These features often appeal to investors transitioning from active ownership to a more passive financial lifestyle.

5. Risks and Limitations of DST Investments

DSTs are not suitable for every investor. Consider:

• No control: You cannot influence sale timing or property management decisions.
• Illiquidity: DST interests typically cannot be sold early; expect a multi-year hold.
• Sponsor dependency: Performance depends heavily on the quality of the sponsor.
• Real estate risk: Market shifts, tenant issues, and economic cycles still apply.
• Tax complexity: DSTs often interact with broader strategies like future 1031 exchanges or potential 721 UPREIT conversions.

These trade-offs make DSTs better suited for investors who prioritize passive income and tax deferral over control.

6. Where a DST 1031 Exchange Fits Into Your Bigger Financial Plan

Deciding whether to use a DST for a second home sale isn’t just a real estate decision—it’s a comprehensive planning decision.

Considerations include:

Income

Will DST distributions meet your needs relative to your lifestyle and retirement goals?

Taxes

What is your projected capital gains exposure?

Could other strategies—such as installment sales, Opportunity Zone funds, charitable remainder trusts (CRTs), bonus depreciation funds, or oil & gas programs—play a role in reducing or deferring taxes?

Liquidity

Are you comfortable with a long-term hold, or do you need flexibility?

Estate planning

How does a DST interest compare to direct real estate in your estate plan?

Risk tolerance

Are you comfortable relying on sponsors and the real estate cycle?

Ultimately, the “right” choice depends on your tax picture, your income needs, your investment preferences, and the legacy you wish to build.

Final Thought

Exchanging a second home into a DST through a 1031 exchange can be a powerful tax-deferral strategy—but only if your property meets IRS requirements, you understand the risks, and the approach aligns with your long-term financial goals.

For some owners, it’s a way to reduce taxes, eliminate landlord responsibilities, and create passive income. For others, selling outright or using alternative tax strategies may make more sense.

If you're considering selling a second home or investment property and want clarity on how a 1031 exchange, DST, or other tax-efficient strategies may apply, Wealthstone Group can help you compare your options with confidence.

Considering a 1031 Exchange?

To learn more about leveraging a 1031 exchange for tax deferral, download our free e-book today!

General Disclosure

Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.

Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.

Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.