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:
This article breaks down those issues in plain language so you can make an informed decision before moving forward.
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:
Traditional exchanges typically involve going from one directly owned property to another, which can be challenging when:
This is why DSTs are often used as the replacement option.
A DST is a legal structure allowing multiple investors to own fractional interests in large, institutional-quality real estate.
Key features:
The DST structure gives investors access to passive, professionally managed real estate without the operational responsibilities of direct ownership.
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:
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.
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 tenants, no maintenance issues, no need to oversee contractors or leasing.
DSTs invest in larger properties typically unavailable to individual investors.
Proceeds can often be allocated across multiple DSTs—different geographies, sectors, and tenant bases.
DSTs are usually “ready to close,” which can help meet strict exchange deadlines.
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.
DSTs are not suitable for every investor. Consider:
These trade-offs make DSTs better suited for investors who prioritize passive income and tax deferral over control.
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:
Will DST distributions meet your needs relative to your lifestyle and retirement goals?
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?
Are you comfortable with a long-term hold, or do you need flexibility?
How does a DST interest compare to direct real estate in your estate plan?
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.
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.
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.