--- title: Can You Use a DST to Complete the Remaining Portion of a 1031 Exchange? description: Explore how investors can use Delaware Statutory Trusts to complete a 1031 exchange after acquiring a direct property, ensuring tax deferral and strategic planning. image: https://blog.wealthstonegroup.com/hubfs/sean-pollock-PhYq704ffdA-unsplash-min.jpeg --- - Client Portal [![Gold-Logo-1](https://blog.wealthstonegroup.com/hs-fs/hubfs/Gold-Logo-1.png?width=2000&height=380&name=Gold-Logo-1.png "Gold-Logo-1")](https://www.wealthstonegroup.com/) [![Wealthstone-logo-gold](https://blog.wealthstonegroup.com/hs-fs/hubfs/Gold-Logo-1.png?width=2000&height=380&name=Gold-Logo-1.png "Wealthstone-logo-gold")](https://blog.wealthstonegroup.com/) - [About](https://www.wealthstonegroup.com/about) - [Real Estate](https://www.wealthstonegroup.com/real-estate) - [1031 Exchanges](https://www.wealthstonegroup.com/real-estate/1031-exchanges) - [1033 Exchanges](https://www.wealthstonegroup.com/real-estate/1033-exchanges) - 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An investor may purchase one direct property and still have exchange proceeds remaining with the qualified intermediary that need to be reinvested. In that situation, a [Delaware Statutory Trust](https://www.wealthstonegroup.com/real-estate/delaware-statutory-trusts), or DST, may potentially be used to complete the remaining portion of the exchange. This can be useful when an investor has already acquired the direct property they wanted but does not necessarily want to find, finance, and manage another property simply to complete the exchange. The first step, however, is not selecting a DST. It is determining what the investor still needs to accomplish with the remaining portion of the exchange. > When an investor has already completed part of a 1031 exchange, the question is not simply where to place the remaining cash. The first step is understanding what the overall exchange still needs to accomplish. ## Start With What Still Needs to Be Replaced Consider an investor who sells a property for $4 million and purchases a $1.5 million direct replacement property. The remaining exchange proceeds are still being held by the qualified intermediary. It may seem straightforward to look at the cash remaining with the QI and invest that amount into one or more DSTs. But the cash balance does not necessarily tell the whole story. The investor also needs to understand the total replacement value and financing structure necessary to achieve the desired level of tax deferral. If the relinquished property had debt, for example, the investor should understand how debt relief, the equity being reinvested, and the value of the replacement properties affect the exchange. This can become particularly important when the first replacement property was purchased with little or no debt. The investor may have reinvested a significant amount of equity but still need additional replacement value to accomplish the intended tax outcome. Certain DSTs include financing at the property level, with investors receiving their proportionate share of the DST's debt. Depending on the investor's situation, that leverage may help address the remaining requirements of the exchange. The specific tax calculation should be made with the investor's CPA or tax advisor. But from a planning perspective, the sequence is important: determine what remains to be replaced first, then evaluate which investments can appropriately complete the exchange. ## Consider the 45-Day Identification Deadline Once the investor understands what remains to be accomplished, the next issue is timing. 1031 exchange investors generally have 45 days from the sale of the relinquished property to identify replacement property and 180 days to complete the exchange, subject to applicable tax-return deadline rules. That creates an important distinction for someone considering a DST. Identifying a DST before Day 45 does not generally mean the investor must purchase it by Day 45. The acquisition may occur later during the exchange period. But having additional time under the 1031 rules does not mean there will still be sufficient equity remaining in that particular DST offering when the investor is ready to invest. > The IRS exchange timeline and the fundraising timeline of a DST are two different things. An investor may have time remaining in the exchange even though the equity in an identified offering has already been fully subscribed. ## How Much Equity Will Remain in the DST? DST offerings have a finite amount of equity available to investors. As subscriptions are received, the amount of equity remaining in the offering declines until the DST is fully subscribed. An investor might therefore identify a DST on Day 40 with the intention of investing several weeks later. If other investors subscribe to the offering in the meantime, there may not be enough equity remaining to accommodate the investor's intended allocation when they are ready to close. That possibility should be considered when developing the identification strategy. Investors should understand how much equity currently remains in an offering, the pace at which the DST is raising capital, and how that compares with their anticipated investment timeline. Depending on the offering, it may also be worth understanding whether the sponsor can accommodate a delayed closing or reserve a particular allocation. There is no guarantee that sufficient equity will remain in an identified DST simply because the investor still has time remaining in the 180-day exchange period. This is also why investors may consider identifying multiple potential replacement properties within the applicable 1031 identification rules. The objective is not simply to put a DST on an identification form before Day 45. It is to develop an identification strategy that provides a realistic path toward completing the exchange if one of the identified DSTs becomes fully subscribed. The specific identification requirements should be coordinated with the investor's qualified intermediary and tax or legal advisors. ## The DST Still Has to Make Sense as an Investment Once the exchange requirements and identification strategy are understood, the DST itself needs to be evaluated. An approaching deadline should not turn investment selection into a search for whichever offering still has enough equity remaining to accept the investment. The underlying real estate, property type, geography, tenants, sponsor, leverage, expected cash flow, fees, hold period, and exit strategy all matter. The investor should also consider how the DST fits alongside the replacement property already acquired. For some investors, the DST may provide diversification and passive ownership alongside a directly owned property. For others, its financing may be important to the overall exchange structure. An investor may also choose multiple DSTs rather than concentrating the remaining proceeds into one investment. The potential exit matters as well. A traditional DST may eventually sell its real estate and potentially provide another opportunity for a 1031 exchange, while certain offerings may contemplate a future 721 UPREIT transaction. Those are different long-term outcomes and should be understood before investing. The DST should therefore be evaluated as part of the investor's overall real estate and exchange strategy, not simply as a place to invest the remaining cash. ## How to Approach the Remaining Portion of Your Exchange For an investor who has already purchased one replacement property, the remaining decisions should follow a relatively simple sequence. First, determine what still needs to be replaced to achieve the desired tax outcome, including the implications of any debt. Next, evaluate the direct properties or DSTs that can potentially satisfy those requirements. Then develop an identification strategy that accounts for the 45-day deadline and the amount of equity expected to remain in the identified DST offerings when the investor is ready to close. Only after those pieces are understood should the investor decide which DSTs make sense from an investment and portfolio perspective. ## Conclusion A DST can potentially be used to complete the remaining portion of a 1031 exchange after an investor has already purchased another replacement property. But the remaining cash at the qualified intermediary is only the starting point. The investor also needs to understand the remaining replacement requirements, financing, identification deadline, the equity remaining in the DSTs being considered, and how each investment fits with the replacement property already acquired. Working through those issues in the right order makes the process much easier to navigate. Rather than approaching Day 45 looking for somewhere to place the remaining proceeds, the investor can evaluate the DST as one component of a broader 1031 exchange strategy. A structured planning discussion, coordinated with the investor's qualified intermediary and tax advisor, can help determine what remains to be replaced and how direct real estate, DSTs, or a combination may fit within the overall exchange. *General Disclosure* *This material is provided for informational and educational purposes only and is based on information from sources we believe to be reliable. However, its accuracy is not guaranteed, and it is not intended to be the sole basis for investment decisions or to meet specific investment needs.* *Wealthstone Group does not offer tax or legal advice. This content should not replace professional advice tailored to your individual situation.* *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. 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