# 1031 Exchange Alternatives: 9 Ways to Defer, Spread or Pay Tax

> 1031 exchange alternatives compared: DSTs, 721 exchanges, installment sales, deferred sales trusts, Opportunity Zones, charity and paying the tax.

Source: https://baker1031.com/learn/1031-exchange-alternatives


By Jerry Baker, Founder, Baker 1031 Investments. Updated October 28, 2026. Topic: 1031 Exchanges. Draft for review; not yet approved by Aurora Securities.

## The short answer

1031 exchange alternatives are the other ways to handle the tax when you sell investment real estate, such as an installment sale, an Opportunity Zone investment, a deferred sales trust or simply paying the tax. Paying it can cost up to 20% federal tax on long-term gain and 25% on gain from past depreciation, plus a possible 3.8% surtax.

## Key takeaways

- Your options fall into three groups. You can defer the tax with a different rule, spread it over time, or pay it now and keep full freedom with the cash.
- Some popular "alternatives" are really 1031 exchanges in a different form. A Delaware Statutory Trust (DST) and a later 721 exchange into a REIT's partnership both start with a 1031.
- An installment sale spreads your gain over the years you collect payments. You become the lender, so you take on the risk that the buyer stops paying.
- A deferred sales trust builds on the installment sale rules. The IRS has not issued a ruling or regulation that specifically addresses it, so get independent tax and legal advice before you use one.
- An Opportunity Zone investment can take gain from any kind of capital asset, not just real estate. Its rules changed for money invested after December 31, 2026.
- Every path here involves trade-offs in control, cash, cost and risk. None of this is tax or legal advice, so confirm your plan with your CPA, attorney and qualified intermediary.

## What are your options when you sell investment real estate?

Let me set up the problem in plain terms first. Then we'll walk through each path.

When you sell a building for more than your tax cost in it, you have a **capital gain**. Your tax cost is called your **basis**. It starts as what you paid. It goes down each year by the depreciation you deduct. So after many years of owning a rental, your basis can be far below the price you get.

The gap between the sale price (after selling costs) and your basis is your gain. That gain is what gets taxed.

A **1031 exchange** is the most familiar way to put off that tax. It's named for Section 1031 of the tax code. It lets you sell investment or business real estate and buy other investment or business real estate without paying tax on the gain right away. The tax is **deferred**, which means postponed, not forgiven.

A 1031 exchange has strict rules. You must use a **qualified intermediary**, or QI. That's an independent company that holds your sale money so you never touch it. You must name replacement property in writing within 45 days. You must close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. My guide to the [1031 exchange rules](/learn/1031-exchange-rules) covers each one in detail.

Those rules don't fit everyone. Maybe you don't want to own more real estate. Maybe you want some cash. Maybe the market is thin and you can't find a property you like in 45 days. Or maybe your gain is small enough that the work isn't worth it.

That's where alternatives come in. Here is how I group them.

| Group | What it does | Paths in this guide |
|---|---|---|
| Change what you buy in the 1031 | Keeps the 1031 deferral but changes what you own | Direct property, DST, a 721 exchange later |
| Defer under a different rule | Uses another section of the tax code | Opportunity Zone investment, charitable remainder trust |
| Spread the tax over time | Reports gain as you collect payments | Installment sale, deferred sales trust |
| Pay or avoid a sale | Pays the tax now, or holds until death | Taxable sale, holding for heirs |

None of these is right for every seller. Each one trades something away. As we go, I'll point out what you give up as well as what you get.

## How much tax are you trying to defer?

Before you compare options, you need a rough number. An alternative only makes sense if the tax it saves is worth what it costs.

### The federal rates that apply to most real estate sales

For property held more than a year, three federal pieces usually apply.

1. **Long-term capital gain.** [Section 1(h) of the tax code](https://www.law.cornell.edu/uscode/text/26/1) sets rates of 0%, 15% and 20% on long-term gain. Higher earners pay 20%.
2. **Gain from past depreciation.** The part of your gain that comes from depreciation you deducted on a building is called "unrecaptured Section 1250 gain." It's taxed at up to 25%.
3. **The net investment income tax.** This is a 3.8% surtax. The [IRS explains](https://www.irs.gov/individuals/net-investment-income-tax) that it applies to the smaller of your net investment income or the amount your modified adjusted gross income is above a threshold. The threshold is $250,000 for married couples filing jointly and $200,000 for single filers.

Many states add their own income tax on top. Ask your CPA how your state taxes the gain.

### A worked example: what a taxable sale would cost

This is a hypothetical example with round numbers. It doesn't describe any real client or property. Your CPA should run your real figures.

Say you bought a small apartment building for $900,000. Over the years, you deducted $300,000 of depreciation. So your adjusted basis is $600,000. You own it free and clear.

You sell it for $1,500,000 and pay $60,000 in selling costs.

| Item | Amount |
|---|---|
| Sale price | $1,500,000 |
| Less selling costs | ($60,000) |
| Amount realized | $1,440,000 |
| Less adjusted basis | ($600,000) |
| Gain | $840,000 |

Now assume you're in the top federal brackets. Assume your other income already puts you above the 3.8% tax threshold.

- Depreciation portion: $300,000 × 25% = $75,000
- Remaining long-term gain: $540,000 × 20% = $108,000
- Net investment income tax: $840,000 × 3.8% = $31,920
- **Federal total: about $214,920**

That leaves about $1,225,080 before state tax. In a 1031 exchange, the whole $1,440,000 could go into replacement property instead. The $214,920 difference is what's at stake. For a rough version with your own numbers, try my [1031 tax deferral calculator](/tools/1031-tax-deferral-calculator).

Keep this example in mind. I'll come back to it as we look at each path.

## Option 1: Exchange into property you own and manage yourself

The traditional 1031 is still the starting point. You sell one property and buy another that you own directly. Directly means your name, or your entity's name, is on the deed.

### What you get

- **Full deferral, if you follow the rules.** To defer all of the gain, you generally buy property worth at least your amount realized. You reinvest all of the cash. You also replace any debt you paid off, with new debt or added cash.
- **Control.** You pick the property, the tenant, the loan and the day you sell.
- **A chain.** When you sell the new property, you can exchange again. Each exchange carries your old basis forward.

### What you give up

- **Your time.** You're still a landlord, or you're paying a manager.
- **Concentration.** Your equity often ends up in one or two buildings.
- **Deadline pressure.** The identification and closing deadlines can push you to overpay.

A common version is a single-tenant building on a **triple net lease**, or NNN. In that kind of lease, the tenant pays the property taxes, insurance and maintenance on top of rent. You still own the building and carry the risk of one tenant. My guide to [1031 exchange triple net lease properties](/learn/dst-vs-nnn) compares owning one outright with owning one through a DST.

If you plan to take some cash out of the exchange, that cash is called **boot**, and it's taxable. My guide to the [partial 1031 exchange](/learn/partial-1031-exchange-boot) shows how boot is taxed.

## Option 2: Exchange into a DST for passive ownership

A **Delaware Statutory Trust**, or DST, is a trust that owns real estate. Many investors each own a fractional interest in it. A company called the **sponsor** finds the property, arranges any loan, and manages it for the life of the trust.

A DST isn't really an alternative to a 1031. It's a way to do a 1031 without being a landlord. Under [IRS Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf), "A taxpayer may exchange real property for an interest in the Delaware statutory trust" without recognizing gain, as long as the other Section 1031 rules are met. So a DST interest can qualify as replacement property in your exchange.

### Why some sellers look at DSTs

- **Passive ownership.** You don't deal with tenants, repairs or loans.
- **Lower minimums.** You can split your equity across several properties and sponsors.
- **Speed.** DST properties are already acquired when they're offered. That can help when your 45-day window is short.
- **Backup identification.** Some investors name a DST as a backup on their 45-day list. A backup only works if it was identified in writing within the 45 days.

### What you give up

- **Control.** The sponsor makes every decision. You have no vote on when the property is sold.
- **Liquidity.** DST interests generally can't be sold until the property sells. The SEC's [bulletin on private placements](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/private) tells investors they "should be prepared to hold the securities indefinitely."
- **Certainty.** Distributions are not guaranteed. They can be cut or stopped. You can lose your entire investment.
- **Fees.** DSTs carry upfront costs and ongoing fees that reduce returns.

DSTs are securities. They are sold through a **private placement memorandum**, or PPM, which is the legal document that describes the offering and its risks. Most DSTs are offered only to accredited investors. Under the [SEC's accredited investor rules](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3), an individual generally qualifies with income above $200,000 in each of the past two years ($300,000 with a spouse or spousal equivalent) and a reasonable expectation of the same this year. Net worth above $1 million, not counting your primary home, also qualifies. So do certain licenses held in good standing, such as the Series 7, 65 or 82.

My [DST guide](/learn/dst-guide) explains how these trusts work, what they cost and how to read an offering.

## Option 3: Exchange first, then move into a REIT partnership later

A **REIT**, or real estate investment trust, is a company that owns income-producing real estate. Many REITs are set up as an **UPREIT**. In that setup, the buildings are owned by a partnership under the REIT, called the **operating partnership**, or OP. Ownership stakes in that partnership are called **OP units**.

A **721 exchange** is named for [Section 721 of the tax code](https://www.law.cornell.edu/uscode/text/26/721). That section says no gain is recognized "in the case of a contribution of property to the partnership in exchange for an interest in the partnership." In real estate, it's the rule that lets property go into a REIT's operating partnership for OP units without current tax.

You generally can't 1031 straight into REIT shares. REIT shares are stock, not real property. So the usual route has two steps. You do a 1031 into a DST whose sponsor is tied to a REIT. Later, the REIT's operating partnership may buy the DST property for OP units.

### Why some sellers consider it

- **Diversification.** You end up owning a slice of a whole portfolio instead of one building.
- **Divisibility.** Units can be split among heirs or redeemed in pieces.
- **A path to some liquidity.** Units can usually be redeemed after a holding period, subject to the REIT's limits.

### The catch

It's a one-way door. Once you hold OP units, you can't do another 1031 exchange with them. Cashing out units, or converting them to REIT shares, is generally taxable. The REIT's operating partnership usually decides whether the 721 step happens at all, so you can't count on it. My [721 exchange guide](/learn/721-exchange-guide) walks through the timeline, the debt math and the risks.

## Option 4: Sell on an installment sale

Now we leave the 1031 behind. An installment sale is the oldest alternative, and it's written right into the tax code.

### How does an installment sale work?

IRS [Publication 537](https://www.irs.gov/publications/p537) defines it simply: "An installment sale is a sale of property where you receive at least one payment after the tax year of the sale." [Section 453](https://www.law.cornell.edu/uscode/text/26/453) is the law behind it.

In plain words, you act as the bank. The buyer pays you part of the price at closing, or nothing at all. The rest comes in payments over time, with interest. This is often called **seller financing**.

You don't report the whole gain in the year of sale. You report it as you receive the payments.

### What is each payment made of?

Publication 537 says each payment usually has three parts:

1. **Interest.** This is ordinary income, taxed at your regular rates.
2. **Return of basis.** This part isn't taxed, because it's your own tax cost coming back to you.
3. **Gain.** This part is taxed as gain in the year you receive it.

The split comes from a ratio called the **gross profit percentage**. Publication 537 says it "is figured by dividing your gross profit from the sale by the contract price." In most simple sales, the contract price is the selling price. The percentage usually stays the same for every payment.

### A worked example of an installment sale

This is the same hypothetical apartment building from earlier. The numbers are made up and simplified. They don't describe any real sale.

You sell for $1,500,000. You have $60,000 of selling costs and an adjusted basis of $600,000. So your gross profit is $840,000.

The buyer pays $300,000 down at closing. You carry a $1,200,000 note. The buyer pays $120,000 of principal each year for ten years, plus interest.

| Item | Amount |
|---|---|
| Gross profit | $840,000 |
| Contract price | $1,500,000 |
| Gross profit percentage | 56% |
| Gain reported in the year of sale ($300,000 × 56%) | $168,000 |
| Gain reported each later year ($120,000 × 56%) | $67,200 |
| Interest each year | Taxed separately as ordinary income |

Instead of reporting $840,000 of gain in one year, you report $168,000 in year one and $67,200 a year after that. Spreading gain can keep more of it in lower brackets. It can also reduce how much of it is hit by the 3.8% tax. How much it helps depends on your other income each year.

### The rules that catch people

- **Depreciation recapture comes first.** Publication 537 says "you must report any depreciation recapture income in the year of sale," even if you receive no payment that year. [Section 453(i)](https://www.law.cornell.edu/uscode/text/26/453) says the same. How much of a building's gain counts as recapture income depends on how it was depreciated. For a building depreciated on the straight-line method, there is often little or no recapture income. Ask your CPA to run this before you agree to terms.
- **Large notes can carry an interest charge.** Under [Section 453A](https://www.law.cornell.edu/uscode/text/26/453A), if a sale is over $150,000 and the notes from such sales that arose during the year and are still unpaid at year end total more than $5,000,000, interest is charged on the deferred tax.
- **Borrowing against the note can count as a payment.** Section 453A also has a pledge rule. If you use the note as security for a loan, "the net proceeds of the secured indebtedness shall be treated as a payment received."
- **Selling to a relative has a two-year trap.** If you sell to a related person and they resell within two years, you may have to report your deferred gain at that point.
- **The interest rate must be adequate.** If the contract has little or no interest, part of the principal can be treated as interest. Publication 537 explains the test rates.
- **You can elect out.** If you'd rather report the whole gain in the year of sale, you can. The election is made by your return due date, including extensions.
- **Dealers generally can't use it.** Property held for sale to customers in the ordinary course of business doesn't qualify.

You'll report installment income on IRS [Form 6252](https://www.irs.gov/forms-pubs/about-form-6252) in the year of sale and each year you receive a payment.

### What you give up

The tax deferral is real, but so is the risk.

- **Credit risk.** If the buyer stops paying, you may have to foreclose. That takes time and money, and you may get back a property in worse shape.
- **No diversification.** Your money is tied to one buyer and one property.
- **Interest rate risk.** You lock in a rate for years. If rates rise, your note is worth less.
- **Ordinary income on interest.** The interest you earn is taxed at your regular rates every year.

An installment sale tends to fit when you know the buyer, trust the collateral and want income more than cash up front.

## Option 5: Use a deferred sales trust

A **deferred sales trust** is a structure that is marketed as a way to sell property, receive the sale proceeds over time, and defer the gain under the installment sale rules. I'll describe it as it's generally presented, without endorsing it.

### How it is usually described

1. Before closing, you sell your property to a trust in exchange for an installment note. The trust is set up by a third party, and you are not the trustee.
2. The trust sells the property to the real buyer for cash.
3. The trust's trustee invests the cash in a portfolio, which may hold stocks, bonds, real estate or other assets.
4. The trust pays you under the note, on a schedule you agreed to in advance.
5. You report gain as you receive principal payments, using the installment method under Section 453.

The structure's appeal is that, unlike a 1031, it doesn't require you to buy real estate. Unlike a simple installment sale, your payments come from a portfolio instead of one buyer.

### What the IRS has and hasn't said

The IRS has not issued a revenue ruling, regulation or other published guidance that specifically addresses deferred sales trusts. That means no IRS guidance confirms the tax result for this structure. Promoters generally rely on the general installment sale rules in Section 453.

The IRS has spoken about a different arrangement with some similar features. In 2023, Treasury and the IRS [proposed regulations](https://www.irs.gov/newsroom/treasury-and-irs-issue-proposed-regulations-identifying-certain-monetized-installment-sales-as-listed-transactions) that would identify certain "monetized installment sales" as listed transactions. The IRS describes listed transactions as "abusive tax transactions that must be reported to the IRS." In the transactions the IRS described, the seller sells to an intermediary for an installment note and also receives a loan funded by the sale proceeds. As of October 2026, those regulations are still only proposed. Under the [proposed rule](https://www.federalregister.gov/documents/2023/08/04/2023-16650/identification-of-monetized-installment-sale-transactions-as-listed-transactions), the listing would take effect only when final regulations are published.

A deferred sales trust is marketed as a different structure. But the comparison shows why the details matter. If you look at a deferred sales trust, ask your own tax attorney, not the promoter's, to explain how it differs from the transactions the IRS described.

### Questions to ask before you use one

- **Who controls the money?** If you control the trust or its investments, the IRS could treat you as having received the proceeds. That would make the gain taxable now.
- **What does it cost?** Ask for every fee in writing: setup, legal, trustee, investment management and any ongoing charges.
- **What happens if the portfolio loses money?** Your payments come from the trust's investments. If they fall, the trust may not be able to pay you in full.
- **Is the trustee independent?** Ask who the trustee is, who pays them, and how they can be replaced.
- **What will your CPA sign off on?** Your return preparer has to be comfortable reporting the sale as an installment sale.

### Deferred sales trust vs. DST: what is the difference?

The names sound alike, and people mix them up. They are completely different tools.

| Question | Deferred sales trust | Delaware Statutory Trust (DST) |
|---|---|---|
| Tax rule it relies on | Installment sale rules, Section 453 | Section 1031 and Rev. Rul. 2004-86 |
| Specific IRS guidance | None specific to the structure | Rev. Rul. 2004-86 |
| What you own | A promise to be paid under a note | A fractional interest in a trust that owns real estate |
| Must you reinvest in real estate? | No | Yes, the DST owns real property |
| Qualified intermediary | Not part of the structure | Required for the 1031 |
| Deadlines | Trust must be in place before closing | 45 days to identify; 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first |
| How gain is taxed | As principal payments arrive | Deferred until you sell for cash; can be exchanged again |
| Who manages the money | A trustee and investment manager | A real estate sponsor |
| Main risks | Tax treatment untested by specific guidance, fees, portfolio losses | Illiquidity, sponsor reliance, loss of principal, fees |

## Option 6: Reinvest the gain in an Opportunity Zone

An **Opportunity Zone** is a low-income census tract (a small area the Census Bureau uses to count people) that a state nominated and the Treasury certified. Congress created the program in 2017. You invest through a **qualified opportunity fund**, or QOF. That's a partnership or corporation that must hold at least 90% of its assets in Opportunity Zone property.

### How it differs from a 1031

- **Only the gain has to go in.** The [IRS Opportunity Zones FAQs](https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions) say "the amount of the eligible gain must be timely invested in a QOF." In a 1031, you reinvest the full proceeds.
- **Any capital gain can qualify.** Gains from stock, a business or real estate can all be eligible. The [IRS says](https://www.irs.gov/credits-deductions/businesses/invest-in-a-qualified-opportunity-fund) eligible gains include "both capital gains and qualified 1231 gains." Gain on business or rental real estate held more than a year is often Section 1231 gain, so ask your CPA how yours is classified.
- **The clock is different.** You generally have 180 days from the date the gain would be recognized to invest it. There's no 45-day list and no qualified intermediary.
- **You buy a security, not real estate.** A QOF interest is equity in a fund.

### The rules changed in 2025

The One Big Beautiful Bill Act, signed July 4, 2025, rewrote [Section 1400Z-2](https://www.law.cornell.edu/uscode/text/26/1400Z-2) for money invested after December 31, 2026.

- **Invested through December 31, 2026:** the deferred gain is taxed in the year that includes the earlier of when you sell the fund interest or December 31, 2026. So an investment made in 2026 generally defers the gain only to the end of 2026.
- **Invested after December 31, 2026:** the deferred gain is taxed at the earlier of when you sell the fund interest or five years after you invested. If you hold for five years, your basis goes up by 10% of the deferred gain, or 30% for a qualified rural opportunity fund.
- **Both periods:** if you hold the fund interest at least 10 years and make the election, gain on the investment's growth can be excluded. For money invested after 2026, that basis is measured no later than 30 years after the investment.

Opportunity Zone funds are securities with their own risks, including illiquidity, fund-manager risk and the risk of loss. My guide to [Opportunity Zone funds](/learn/opportunity-zone-funds) explains how they work. For a side-by-side look at which defers more, see my [Opportunity Zone vs. 1031 exchange comparison](/learn/opportunity-zone-vs-1031-exchange).

## Option 7: Give part to charity through a charitable remainder trust

A **charitable remainder trust**, or CRT, is an irrevocable trust. Irrevocable means you can't take the property back. You put property in. The trust pays you, or people you name, for up to 20 years or for life. When the payments end, what's left goes to charity.

The tax rules come from [Section 664](https://www.law.cornell.edu/uscode/text/26/664). A qualifying trust is generally not subject to income tax itself. So the trust can sell the property it receives without paying tax on the gain at the trust level. You pay tax on the payments you receive, under rules your CPA will apply.

A few rules shape every CRT.

- **The payout has limits.** For an annuity trust, the yearly payment must be "not less than 5 percent nor more than 50 percent" of the starting value.
- **Charity must get a real share.** The charity's remainder must be worth "at least 10 percent of the initial net fair market value" of what you put in, measured with IRS tables.
- **It's permanent.** What goes in doesn't come back to your family as principal.

A CRT is a charitable tool first and a tax tool second. It makes sense only if you truly want to leave money to charity. Debt on the property and timing of the transfer can cause problems, so this needs an estate attorney and a CPA from the start.

## Option 8: Sell and pay the tax

Paying the tax is a legitimate choice. In some cases, it's the most sensible one.

### When paying the tax can make sense

- **Your gain is small.** If the tax is modest, the cost and stress of an exchange may not be worth it.
- **You want out of real estate entirely.** A 1031 keeps you in real property. If you want cash for retirement, a business or family, a taxable sale gives it to you.
- **The replacement would be a bad buy.** Overpaying under deadline pressure can cost more than the tax you'd defer.
- **You have losses to use.** Capital losses from other investments may offset part of your gain.
- **You expect to need the money soon.** Deferral helps most when you can leave the money invested for years.

### What you get

You get full freedom. You can invest anywhere, keep cash or pay off debt. You also get a fresh, higher basis in whatever you buy next. That means larger depreciation deductions if you buy another rental with after-tax money.

### What it costs

In the hypothetical example above, the federal bill was about $214,920. That's money that won't be working for you. Whether that matters depends on what you'd do with it, how long you'd hold, and what your heirs might receive. There's no single right answer.

## Option 9: Keep the property and leave it to your heirs

The last path is not to sell. Under [Section 1014](https://www.law.cornell.edu/uscode/text/26/1014), the basis of inherited property is generally "the fair market value of the property at the date of the decedent's death." So if you hold property until you die, your heirs generally take it at a stepped-up basis. The gain you built up isn't taxed to anyone under current law.

This is the idea behind the phrase "swap till you drop." You keep exchanging during your life. Your heirs inherit at a stepped-up basis. My guide to the [step-up in basis](/learn/step-up-in-basis) explains how it works and what the estate tax adds.

Two cautions apply. First, Congress can change these rules. Second, holding a property you no longer want to manage, only for the tax result, has its own costs. A DST is one way some owners keep the 1031 chain going without staying hands-on.

## Can you move stock or business gains into real estate tax-deferred?

Not with a 1031. [Section 1031](https://www.law.cornell.edu/uscode/text/26/1031) applies only to "real property held for productive use in a trade or business or for investment." Stock, bonds and business interests aren't real property. So a gain on a large stock position can't be exchanged into a building.

Of the paths in this guide, an Opportunity Zone investment is the one built to take gains from any capital asset. Gains from stock sales can be eligible, if you invest them in a QOF within the 180-day window. The fund, not you, owns the real estate or business.

You can also simply sell the stock, pay the tax, and buy real estate with what's left. Some people spread stock sales over several years to manage brackets. Your CPA can model both.

## What about syndications, crowdfunding and REIT shares?

These are common ways to own real estate passively. But they generally don't work as 1031 replacement property.

- **Syndications and crowdfunding.** These usually sell you an interest in an LLC or limited partnership that owns the property. An interest in an entity isn't real property, so it generally doesn't qualify.
- **REIT shares.** These are stock. They don't qualify either. A 721 exchange, described above, is the route into a REIT's partnership after a DST.
- **DSTs.** A DST is structured so that, for tax purposes, you're treated as owning an interest in the real estate itself. That's why a DST interest can qualify as replacement property under Rev. Rul. 2004-86.

If you sell and pay the tax, any of these can be fine investments of after-tax money. Just don't plan a 1031 around them.

## 1031 exchange alternatives compared side by side

Here's how the main paths compare. These are general features under federal law as of October 2026, not promises about any deal.

| Path | Tax on the gain | Must you buy real estate? | Cash in hand | Control | Liquidity | Key risk |
|---|---|---|---|---|---|---|
| 1031 into direct property | Deferred while you keep exchanging | Yes | Only taxable boot | Full | Low; selling takes time | Overpaying under deadlines |
| 1031 into a DST | Deferred while you keep exchanging | Yes, through the trust | Only taxable boot | None | Very low | Illiquidity, sponsor reliance, loss of principal |
| 1031, then 721 into an OP | Deferred until you redeem or convert | First yes, then no | Only taxable boot | None | Limited redemption | One-way door, REIT risk |
| Installment sale | Spread over payment years | No | Down payment, then payments | None over the property | Low; note is hard to sell | Buyer default |
| Deferred sales trust | Spread over payment years, if the structure holds | No | Payments under the note | Limited | Low | Untested tax treatment, fees, portfolio losses |
| Opportunity Zone (invested after 2026) | Deferred up to 5 years; growth can be excluded after 10 | No; you buy a fund | Your basis | None | Low | Fund risk, 5-year tax bill |
| Charitable remainder trust | Trust sells without trust-level tax; payments taxed to you | No | Payments only | Limited | None; irrevocable | Assets leave the family |
| Sell and pay the tax | Due now | No | All net proceeds after tax | Full over cash | High | Tax cost |
| Hold until death | Gain may never be taxed under current law | No | None from the property's value | Full | Low | Law change; staying a landlord |

## One sale, four paths: a hypothetical comparison

Let's put the earlier example through four paths side by side. Again, this is a hypothetical with simplified numbers. It ignores state tax, interest and investment results. It isn't a projection of any outcome.

Your amount realized is $1,440,000. Your gain is $840,000. Your basis is $600,000.

| Path | Money working for you after closing | Federal tax in year one | What happens later |
|---|---|---|---|
| Sell and pay the tax | About $1,225,080 | About $214,920 | Nothing more is owed on this sale |
| 1031 exchange (direct or DST) | $1,440,000 | $0 if fully deferred | Tax deferred until a taxable sale; step-up possible at death |
| Installment sale | $300,000 down, $120,000 a year after | On $168,000 of gain, plus any recapture income | Gain taxed as principal arrives; interest taxed yearly |
| Opportunity Zone (invested after 2026) | $840,000 in a fund, plus $600,000 of basis you keep | $0 on the invested gain | Tax on up to 90% of the deferred gain in year five; growth can be excluded after 10 years |

A few things stand out to me.

First, the 1031 keeps the most money invested, but every dollar has to stay in real estate.

Second, the Opportunity Zone path lets you keep your basis as cash. But tax on up to 90% of the gain comes due in year five, whether or not the fund has paid you anything. You'd need cash to pay it.

Third, the installment sale gives up a lump sum in exchange for spreading the tax. Its value depends on the buyer's ability to keep paying.

Fourth, paying the tax is the simplest path. You're done with this gain, and every choice from here is yours.

## How to choose among your 1031 options, step by step

Here is the order I'd work through the decision. Start early. Several of these paths must be set up before your sale closes.

### Step 1: Estimate your gain and your tax

Pull your purchase price, improvements and depreciation history. Ask your CPA for your adjusted basis and a rough federal and state tax estimate. If the tax is small, you may not need an alternative at all.

### Step 2: Decide whether you want to stay in real estate

This is the biggest fork. If yes, a 1031 is usually where to start, whether into direct property or DSTs. If no, look at the installment sale, an Opportunity Zone investment, a CRT or a taxable sale.

### Step 3: Decide how hands-on you want to be

If you want to keep managing property, a direct exchange fits. If you're done being a landlord, a DST or a later 721 path may fit, with the trade-offs above.

### Step 4: Figure out how much cash you need

A 1031 makes any cash you take taxable. An Opportunity Zone investment lets you keep your basis. An installment sale gives you a down payment and a stream of payments. Match the path to your real need for cash.

### Step 5: Check your timeline

A 1031 needs a QI in place before closing. A deferred sales trust also has to be in place before the sale closes. An installment sale is written into your purchase contract. An Opportunity Zone investment has a 180-day window after the gain. Put every date on one calendar.

### Step 6: Check your eligibility

Most DSTs and many Opportunity Zone funds are offered only to accredited investors. Confirm that you qualify before you plan around them.

### Step 7: Read the documents

For any security, that means the PPM or offering documents. For an installment sale, it's the note and security documents. For a deferred sales trust or CRT, it's the trust agreement and fee schedule. Read them before you commit.

### Step 8: Get sign-off from your CPA and attorney

Ask your CPA and attorney to confirm the tax treatment in writing for your facts. If you're doing a 1031, involve your QI too. Then report the result correctly on your tax return.

## Mistakes to avoid

These mistakes are common, and several of them can't be undone after closing.

1. **Deciding after the sale closes.** A 1031 and a deferred sales trust must be set up before closing. If the money reaches you first, those options are generally gone.
2. **Confusing a DST with a deferred sales trust.** They rely on different tax rules and carry different risks. Make sure you know which one you're being shown.
3. **Treating "deferred" as "forgiven."** Deferral moves the bill to a later year. Plan for the day it comes due, unless you're relying on the step-up at death under current law.
4. **Ignoring depreciation recapture in an installment sale.** Recapture income is reported in the year of sale. That can create a tax bill before you've collected much cash.
5. **Underpricing the buyer's credit risk.** Seller financing makes you the lender. Check the buyer's finances and get solid collateral.
6. **Assuming any real estate investment qualifies for a 1031.** LLC interests, syndications, crowdfunding shares and REIT stock generally don't.
7. **Missing the new Opportunity Zone dates.** Rules differ for money invested before and after January 1, 2027. Know which set applies to you.
8. **Forgetting the cash for a future tax bill.** An Opportunity Zone investment made after 2026 creates tax in year five, whether or not you've sold.
9. **Letting the tax drive a bad investment.** A weak property or fund can lose more than the tax you deferred.
10. **Skipping state tax.** Some states tax gains at high rates. Some track exchanged property after you leave. Ask your CPA how your state treats each path.

## Risks to weigh with each path

Every option has risks. Here are the main ones in plain terms.

- **1031 exchanges.** If you miss a deadline, touch the money or buy the wrong kind of property, the exchange can fail and the gain becomes taxable. Deadline pressure can lead you to overpay.
- **DSTs and OP units.** These are illiquid securities. Distributions are not guaranteed. You have no control, you pay fees, and you can lose your entire investment. Most are for accredited investors only.
- **Installment sales.** The buyer can default. Your money is tied to one note and one property for years.
- **Deferred sales trusts.** There's no specific IRS guidance on the structure. Fees can be high, and the trust's investments can lose value.
- **Opportunity Zone funds.** These are illiquid securities with fund-manager risk and the risk of loss. The tax benefits depend on the fund meeting its rules for years.
- **Charitable remainder trusts.** They're irrevocable. If your plans change, you can't undo them.
- **Holding until death.** Tax law can change. You may keep property you no longer want.
- **Paying the tax.** You lose the use of the money you pay, permanently.

## How I help with these decisions

[My background](/about) is in real estate acquisitions, management and development, and today I help investors build 1031 exchange plans using DSTs from more than 20 institutional sponsors.

Here's how I work. We start with an introductory call about your sale, your debt, your timeline and your goals. If a DST fits, we review opportunities together, and I explain why I'm considering each one, what I like and where I have reservations. Then my team coordinates the paperwork with the sponsor and your QI. Because DST properties are already acquired, closing can often take two to three business days with complete paperwork, funding and approvals.

My firm also offers Opportunity Zone funds (Option 6), through Aurora Securities. Some of the other paths in this guide fall outside both DSTs and Opportunity Zone funds. For those, your CPA and attorney are the right people to lead. When a DST is part of your plan, you can see [the offerings I currently have available](/invest). Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

## What my data shows

If you're weighing a DST against the other paths, a few facts about the market help. Here is what [my offering records](/data/dst-offerings) as of October 2026 show. The set covers 76 DST offerings from 38 sponsors. These numbers describe offerings I track. They aren't a forecast or a promise about any future offering.

### DST minimums vary widely

Several alternatives in this guide need large amounts to make sense. In my offering records as of October 2026, DST minimums vary widely.

| Measure | Value |
|---|---|
| Median minimum investment | $100,000 |
| Range of minimums | $25,000 to $500,000 |
| Offerings starting at $25,000 | 21 (28%) |

Low minimums matter when you're splitting proceeds. For example, you might buy a direct property and need a place for leftover exchange cash that would otherwise become taxable boot.

### The 721 door is open in many offerings, and closed in some

In my offering records as of October 2026, 44 offerings (58%) include an optional 721 exit into a REIT's operating partnership. Another 13 (17%) make it mandatory, 17 (22%) have none, and 2 are unclear.

That matters for this guide. If you aren't sure you're done with 1031 exchanges, the mandatory group locks in the one-way door. The offerings with no 721 exit keep the 1031 chain open.

### Hold periods and debt

In my offering records as of October 2026, a 10-year projected hold is the most common, at 31 offerings. Others project 5 to 10 years or 7 years, and a few are 2-year programs. Your money is generally tied up until the sponsor sells.

On debt, 36 of 76 offerings (47%) are all-cash, with no loan. Another 16 (21%) have loan-to-value above 50%. Loan-to-value, or LTV, is the loan divided by the property's value. Among offerings that use debt, the median LTV is about 49%. If you paid off a loan when you sold, a leveraged DST can help you replace that debt in your exchange.

### Projected distributions

In my offering records as of October 2026, projected year-1 distribution rates have a median of 4.7%, with a range of 4.0% to 9.0% across 71 offerings that published one. These are projections. Distributions are not guaranteed and can be reduced or stopped.

## Frequently asked questions

### What can I do instead of a 1031 exchange when I sell a rental?

You can sell on an installment sale, invest your gain in an Opportunity Zone fund, use a charitable remainder trust, or sell and pay the tax. A deferred sales trust is another option, but the IRS hasn't issued specific guidance on it. Each path trades away something different, so compare them with your CPA before you list the property.

### Has the IRS approved deferred sales trusts?

The IRS has not issued a ruling or regulation that specifically addresses deferred sales trusts. Promoters rely on the general installment sale rules in Section 453. Have your own tax attorney review any proposal before your sale closes.

### How is an installment sale of real estate taxed?

You report gain as you receive principal payments, using the gross profit percentage, and you pay ordinary income tax on the interest. Any depreciation recapture income is reported in the year of sale, even if no payment arrives that year. You report it all on Form 6252.

### Is a DST the same as a deferred sales trust?

No. A DST is a trust that owns real estate, and an interest in one can qualify as 1031 replacement property under IRS Revenue Ruling 2004-86. A deferred sales trust holds sale proceeds and pays you under an installment note, with no specific IRS guidance on the structure.

### Can I defer tax on stock gains by buying real estate?

Not with a 1031 exchange, because stock isn't real property. Capital gains from stock can be eligible for an Opportunity Zone investment if you invest them in a qualified opportunity fund within the 180-day window. That fund is a security with its own risks.

### Can I avoid capital gains tax completely when I sell investment property?

Most paths defer or spread the tax rather than eliminate it. Under current law, property held until death generally gets a stepped-up basis, and an Opportunity Zone investment held 10 years can exclude tax on its growth. Tax law can change, so plan with your CPA and estate attorney.

### Is it ever better to just pay the capital gains tax?

It can be, especially when the gain is small, you want out of real estate, or the only replacement available is a poor buy. Paying the tax also gives you full control of the cash and a fresh basis. Have your CPA compare the after-tax results for your situation.

### Can I 1031 into a real estate syndication or crowdfunding deal?

Generally no, because those usually sell interests in an LLC or partnership, and an entity interest isn't real property. DST interests are structured differently and can qualify as replacement property. You can always invest after-tax money in a syndication if you sell and pay the tax.

### Which of these options have income or net worth requirements?

Most DSTs, and many Opportunity Zone funds, are limited to accredited investors. Installment sales, charitable remainder trusts and direct property exchanges have no accredited investor requirement. Check each offering's documents.

### Can moving into a REIT's partnership replace a 1031 exchange?

Usually it's a later step, not a replacement. Most investors reach a REIT's operating partnership by doing a 1031 into a DST first, and the 721 happens later if the operating partnership acts. After that, you generally can't do another 1031 with the units.

## Before you act

This guide is for education only. It isn't tax, legal or investment advice. Please confirm any plan with your CPA, your attorney and your qualified intermediary before you sign a sale contract. DSTs and Opportunity Zone funds are securities offered only through their offering documents; they are illiquid, distributions are not guaranteed, and you can lose your entire investment.

## Sources

- [26 U.S.C. §1031, Exchange of real property held for productive use or investment (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1031)
- [26 U.S.C. §1, Tax imposed, including capital gains rates (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1)
- [IRS, Net Investment Income Tax](https://www.irs.gov/individuals/net-investment-income-tax)
- [IRS Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf)
- [Investor.gov, Private Placements under Regulation D](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/private)
- [Investor.gov, Updated Investor Bulletin: Accredited Investors](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3)
- [26 U.S.C. §721, Nonrecognition of gain or loss on contribution (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/721)
- [IRS Publication 537, Installment Sales](https://www.irs.gov/publications/p537)
- [26 U.S.C. §453, Installment method (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/453)
- [26 U.S.C. §453A, Special rules for nondealers (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/453A)
- [IRS, Treasury and IRS issue proposed regulations identifying certain monetized installment sales as listed transactions (IR-2023-139)](https://www.irs.gov/newsroom/treasury-and-irs-issue-proposed-regulations-identifying-certain-monetized-installment-sales-as-listed-transactions)
- [IRS, Opportunity Zones frequently asked questions](https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions)
- [Federal Register, Identification of Monetized Installment Sale Transactions as Listed Transactions (proposed rule, Aug. 4, 2023)](https://www.federalregister.gov/documents/2023/08/04/2023-16650/identification-of-monetized-installment-sale-transactions-as-listed-transactions)
- [IRS, About Form 6252, Installment Sale Income](https://www.irs.gov/forms-pubs/about-form-6252)
- [IRS, Invest in a qualified opportunity fund](https://www.irs.gov/credits-deductions/businesses/invest-in-a-qualified-opportunity-fund)
- [26 U.S.C. §1400Z-2, Special rules for capital gains invested in opportunity zones (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1400Z-2)
- [26 U.S.C. §664, Charitable remainder trusts (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/664)
- [26 U.S.C. §1014, Basis of property acquired from a decedent (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1014)

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Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments, LLC is independent of Aurora Securities, Inc. and is not a registered broker-dealer or investment adviser. This content is general education, not investment, tax, or legal advice, and is not an offer to buy or sell securities. Offers are made only through the offering documents to eligible investors, generally accredited investors. DST interests are illiquid, distributions are not guaranteed, and you can lose your entire investment.

Contact: Jerry Baker, Baker 1031 Investments · hello@baker1031.com · (415) 965-0552 · https://baker1031.com/contact