1031 Exchange & DST Glossary
A Plain-English Guide to Key Terms Every Investor Should Know
1031 exchanges and Delaware Statutory Trusts (DSTs) involve specific terminology that can be confusing without the right context.
This glossary provides clear, straightforward definitions to help you better understand the process, evaluate opportunities, and make informed decisions.
CORE 1031 EXCHANGE TERMS
1031 Exchange
A tax-deferral strategy under Section 1031 of the Internal Revenue Code that allows investors to sell investment real estate and reinvest proceeds into like-kind property without immediately paying capital gains taxes.
Like-Kind Property
Real estate that is similar in nature or character, regardless of grade or quality. Most investment real estate qualifies as like-kind to other investment real estate.
Relinquished Property
The property you are selling as part of a 1031 exchange.
Replacement Property
The property (or properties) you purchase in a 1031 exchange to replace your relinquished property.
Qualified Intermediary (QI)
A third-party facilitator required in a 1031 exchange who holds the proceeds from the sale and ensures the transaction complies with IRS rules.
45-Day Identification Period
The timeframe in which an investor must formally identify potential replacement properties after selling their original property.
180-Day Exchange Period
The total time allowed to complete the purchase of replacement property after the sale of the relinquished property.
Boot
Any portion of the exchange that is not reinvested (cash or debt reduction), which becomes taxable.
Debt Replacement Requirement
To fully defer taxes, investors must replace both:
-
The equity from the sale
-
The debt (or invest additional cash)
Constructive Receipt
When an investor has access to or control over sale proceeds. This must be avoided, as it disqualifies the 1031 exchange.
Identification Rules
IRS rules governing how properties can be identified:
-
3-Property Rule – Identify up to 3 properties regardless of value
-
200% Rule – Identify multiple properties up to 200% of the sale value
-
95% Rule – Acquire at least 95% of identified value
DST (DELAWARE STATUTORY TRUST) TERMS
Delaware Statutory Trust (DST)
A legal structure that allows multiple investors to own fractional interests in institutional real estate, qualifying as replacement property in a 1031 exchange.
Beneficial Interest
The ownership stake an investor holds in a DST. Investors do not own the property directly but own a share of the trust.
Sponsor
The firm responsible for:
-
Acquiring the property
-
Structuring the DST
-
Managing the investment
-
Executing the business plan
Master Tenant / Master Lease
A structure where a master tenant leases the property and makes rent payments to the DST, often helping stabilize income.
Non-Recourse Debt
Financing where the investor is not personally liable. The lender’s only recourse is the property itself.
Loan-to-Value (LTV)
The percentage of the property financed with debt.
Example: 50% LTV means half the property is financed.
Cash Flow / Distribution
Income paid to investors, typically on a monthly or quarterly basis.
Targeted Return
Projected income and/or appreciation outlined by the sponsor. Not guaranteed.
Hold Period
The expected length of time the property will be held before being sold, typically 5–7+ years.
Exit Strategy
The sponsor’s plan for selling or transitioning the investment at the end of the hold period.
Illiquidity
The inability to easily sell or access your investment before the property is sold.
Accredited Investor
An investor who meets specific income or net worth requirements required to invest in private offerings like DSTs.
INVESTMENT & STRUCTURE TERMS
Private Placement Memorandum (PPM)
The official offering document that outlines:
-
Investment details
-
Risks
-
Fees
-
Business plan
Subscription Agreement
The document investors sign to participate in a DST investment.
Equity
The amount of cash invested into the property.
Leverage
The use of debt to finance a portion of the investment.
Diversification
Spreading investments across multiple properties, markets, or asset types to reduce risk.
Asset Class
The type of property:
-
Multifamily
-
Industrial
-
Retail
-
Office
-
Medical
Net Operating Income (NOI)
The property’s income after operating expenses but before debt service.
Cap Rate (Capitalization Rate)
A measure of return based on the property’s income relative to its value.
EXIT & LONG-TERM STRATEGY TERMS
1031 Exchange “Up”
Reinvesting into a property of equal or greater value to fully defer taxes.
1031 Exchange “Down”
Reinvesting into a lower-value property, which may result in taxable boot.
Swap ‘Til You Drop
A strategy of continuing to exchange properties to defer taxes indefinitely, potentially eliminating taxes through a step-up in basis at death.
Step-Up in Basis
When heirs inherit property at its current market value, potentially eliminating deferred capital gains taxes.
721 Exchange (UPREIT)
A strategy where investors exchange real estate into a REIT structure, potentially providing liquidity and diversification over time.
RISK & COMPLIANCE TERMS
Market Risk
The risk that property values decline due to economic conditions.
Interest Rate Risk
Changes in interest rates that impact property values and financing.
Tenant Risk
The risk of vacancy or tenant default affecting income.
Sponsor Risk
The risk that the sponsor fails to execute the business plan effectively.
Still Have Questions?
Every 1031 exchange and DST investment involves unique considerations.
If you’d like help understanding how these terms apply to your situation—or reviewing current opportunities—schedule a time to connect.