Tax Strategies Part 2: After the 1031 Exchange, When to Consider a Delaware Statutory Trust

In Part 1 we covered the fundamentals of a 1031 Exchange - how it lets property owners defer capital gains taxes by reinvesting sale proceeds into qualifying real estate, and why the process demands early planning.  

But deferring the tax is only half the equation. The other half is deciding where that equity goes next, and how it fits into the rest of your financial life. 

Not Every Owner Wants Another Property to Manage 

A 1031 exchange can be a powerful tool, but it does require you to reinvest in another property. Beyond the tax deferral, the real question you first have to ask is whether that’s what you want.  

For some property owners, the answer is a straightforward yes. They want to buy another property and keep doing what they’ve been doing as a property owner. For others, especially those getting closer to retirement or who are simply tired of handling the day-to-day oversight, it can be a more nuanced decision. They may like owning property, and the advantages of the exchange, but want to reduce the daily demands of ownership. 

That's where a Delaware Statutory Trust can come into play. 

What Is a Delaware Statutory Trust? 

A Delaware Statutory Trust, or DST, allows investors to own a fractional interest in professionally managed real estate. Examples would include property such as apartment communities, industrial facilities, medical office buildings, or distribution centers. This allows for ownership in the property without taking on the responsibility of managing the leasing, maintenance, or tenant calls themselves. 

When properly structured, a DST can qualify as replacement property for a 1031 Exchange. For those owners that want to reduce their day-to-day involvement, this allows them to take advantage of the tax deferral benefits while shifting to a more passive ownership role. A DST can also offer: 

• Current income from professionally managed assets  
• Diversification across property types or geographic markets  
• Reduced management responsibility, since a third party runs the property 
   

DSTs may not be the right fit for everyone, and they come with their own considerations around liquidity and structure, but they can offer an alternative to a straight property exchange. 

When Is the Deferred Tax Paid? 

Deferring taxes isn’t the same as eliminating them. They are simply pushed down the line, which naturally raises the question: When is the deferred tax paid? The answer is that it comes due when you finally sell your replacement property in a regular, taxable sale rather than roll the proceeds into another exchange. At that point, the originally deferred gain, plus any additional gain from the replacement property, is taxable. 

A few things shape how this plays out in practice: 

• There's no limit to how many times you can exchange - Some owners repeat the process for decades — sell, exchange, sell, exchange — continuing to defer the tax each time as long as they keep reinvesting in qualifying property. 
   
• Holding until death may significantly reduce or eliminate the deferred gain under current tax law - Owners sometimes call this "swap until you drop." If you hold the replacement property until death rather than selling it, your heirs typically receive it at a stepped-up basis — meaning their basis resets to the property's value at the time of death. It effectively wipes out the capital gains tax.  
   
• Deferred gains are taxed under the current rules - What you pay is determined by whatever capital gains rules are in effect at the time of the sale. This is why some owners think carefully about when and under what income circumstances they'd want the tax bill to land. 
   

A 1031 Exchange often extends to estate planning. The decision to keep exchanging, sell, or hold until death isn't just a tax question. It's also about the kind of legacy and flexibility you want to build. 

How This Fits into the Bigger Picture

Whether you reinvest in another direct property or a DST, the important question is how it fits into your broader financial picture. A real estate sale is rarely an isolated event, particularly if the property represents a significant portion of your overall wealth. 

A 1031 Exchange and reinvestment decisions should be considered alongside: 

• Estate and trust planning 
• Charitable giving strategies 
• Ongoing tax-aware planning 
• Long-term investment allocation 

Taking a coordinated approach helps ensure this decision serves your long-term goals. 

Direct Property vs. DST

The Best Time to Start Is Before You Sell

Because 1031 Exchanges run on strict timelines, your ability to strategically think through options shortens once a property is under contract. Starting the conversation early gives you room to bring in the right professionals, clarify what you actually want this transaction to accomplish, and weigh your choices without a looming deadline. 

Whether you're considering direct property ownership, a Delaware Statutory Trust, or other planning strategies, Ledyard can help the conversation alongside your tax and legal advisors. Connect with Ledyard and Book a Call with Scott Coulter.