1031 Debt Replacement: DST Loans, Leverage and Zero-Coupon DSTs

Key takeaways

• When your loan is paid off at a sale, the tax code treats that debt relief like cash you received. If you don't replace it, the gap can be taxable boot.
• You can replace debt with a new loan, with your share of a DST's loan, or with your own added cash. New debt can't fix cash you take out, though.
• A quick way to find the leverage you need: divide the debt you paid off by your net sale price. That's the blended loan-to-value your replacements generally need to reach.
• In my offering records as of October 2026, 36 of 76 DST offerings (47%) are all-cash, 16 (21%) have loan-to-value above 50%, and the median LTV among leveraged offerings is about 49%.
• Zero-coupon DSTs use very high debt to replace large mortgages with little cash. They often pay little or no distribution, can create taxable income with no cash, and carry serious risk if the tenant leaves.
• Debt magnifies losses as well as gains. Pick a DST because you'd want it anyway, not just to avoid tax.

What is 1031 debt replacement?

A 1031 exchange lets you sell investment real estate and buy other investment real estate without paying tax on the gain right away. The tax is deferred, not erased. The rule comes from Section 1031 of the Internal Revenue Code.

Most owners know they need to reinvest their cash. Fewer know that the debt matters too.

When you sell a property with a loan, the buyer's money pays that loan off at closing. You're relieved of the debt. The tax code treats that relief as if you'd been handed cash. Section 1031(d) says that when another party assumes your liability, "such assumption shall be considered as money received by the taxpayer on the exchange."

The Treasury regulation at 26 CFR 1.1031(d)-2 says the same thing in more detail. It treats "the amount of any liabilities of the taxpayer assumed by the other party to the exchange" as money received.

So 1031 debt replacement is the planning step that deals with this. You take on new debt on your replacement property, or you add your own cash, so the debt relief doesn't turn into taxable gain.

Why it's called "boot"

Anything you get in an exchange that isn't like-kind real estate is called boot. Cash you keep is cash boot. Debt you don't replace is often called mortgage boot. The IRS's like-kind exchange fact sheet says that if you receive "cash, relief from debt, or property that is not like-kind," you "may trigger some taxable gain in the year of the exchange."

Boot is taxed only up to the amount of your gain. The rest of the gain can stay deferred. My guide to partial 1031 exchanges and boot walks through the full netting rules with four worked examples. Here I'll focus on the debt side and how DSTs fit in.

Do you have to replace your mortgage in a 1031 exchange?

Not literally. You don't have to take out a new loan. But to defer all of your gain, you generally have to make up for the debt that went away.

You have three ways to do it:

1. Take on new debt. A new mortgage on a property you buy directly counts.
2. Take on a share of a DST's debt. Your share of a leveraged DST's loan generally counts too. I explain why below.
3. Add your own cash. Money from outside the exchange can cover a debt shortfall.

The regulation's netting rule allows all three. Liabilities you take on offset liabilities you're relieved of. Cash you pay offsets liability relief. The IRS instructions for Form 8824 count only "net liabilities assumed by the other party" as money received.

The rule that only works one way

There's one thing debt can't fix. New debt doesn't offset cash you take out of the exchange.

Here's a hypothetical. Say you take $200,000 of sale proceeds for yourself. Then you borrow an extra $200,000 on your replacement. The $200,000 you took is still cash boot. The regulation's example has an investor who took on more debt than he gave up and also received $40,000 in cash. That $40,000 was still taxed.

The logic is simple. If new debt could cancel out cash, anyone could borrow against a new building, keep the sale money, and defer tax on what's really a cash sale.

The two-part rule of thumb

For a fully deferred exchange, the common rule of thumb has two parts:

• Buy replacement property worth at least your net sale price, which is your sale price minus selling costs.
• Reinvest all of your net cash, which is the net sale price minus the loan payoff.

If you do both, the debt usually takes care of itself. Either you took on enough debt, or you added enough cash to reach the value target. The rule of thumb can miss in unusual cases, so your CPA should run the real math.

How do you figure out how much leverage you need?

Here's a shortcut I use with clients. It gives you the blended loan-to-value your replacement property generally needs.

Loan-to-value, or LTV, is the loan divided by the property's value. A 40% LTV means 40% of the price was borrowed.

The formula

Target LTV = debt paid off ÷ net sale price

That works because your net sale price splits into two parts: the debt that was paid off and the cash that went to your qualified intermediary. A qualified intermediary, or QI, is the company that holds your sale money during the exchange so you never touch it. If your replacement has the same split, you hit both targets at once.

A quick hypothetical example

Say your net sale price is $2,280,000, and $900,000 of debt was paid off. That leaves $1,380,000 of cash with your qualified intermediary.

• Target LTV = $900,000 ÷ $2,280,000 = about 39.5%

If you put all $1,380,000 into replacement property with a blended LTV of 40%, you'd buy about $2,300,000 of property with about $920,000 of debt. Both targets are met.

Debt per dollar of equity

Another way to think about it is how much debt each dollar of your equity carries. The formula is LTV ÷ (1 − LTV).

The bottom row is the zone where zero-coupon DSTs live. I cover those later. You can test your own figures with my 1031 boot calculator.

How does a DST loan work?

A Delaware Statutory Trust, or DST, is a trust that owns real estate. Many investors each own a share of it. My guide to Delaware Statutory Trusts covers the structure. Here's how the loan side works.

The trust is the borrower

In a leveraged DST, the sponsor arranges the loan before the offering opens. The sponsor is the real estate company that set up the DST and runs it. The trust itself is the borrower, and the property secures the loan.

You don't apply for the loan, and you don't sign it. There's no credit check on you, no personal financial statement to the lender, and no promise from you to back the loan personally. That's one of the main reasons owners use DSTs to replace debt.

Non-recourse, with carve-outs

DST loans are typically non-recourse to investors. That means if the loan defaults, the lender can take the property. It generally can't come after your personal assets.

Non-recourse loans come with "carve-outs." These are exceptions for bad acts like fraud, misused funds or a voluntary bankruptcy filing. If one happens, the loan can become recourse to whoever signed the carve-out agreement. In a DST, that's usually the sponsor or an affiliate, not you. That's one reason the sponsor's financial strength matters. My guide on what happens if a DST sponsor goes bankrupt covers that risk.

Non-recourse doesn't mean no loss. If a leveraged DST fails, you can lose all the equity you put in.

Why your share of a DST loan counts as replacement debt

A properly structured DST is treated as a grantor trust under IRS Revenue Ruling 2004-86. A grantor trust is one the tax code looks through. Each investor is treated as owning a fractional share of the property itself. That's why a DST interest can qualify as 1031 replacement property.

The same look-through applies to the loan. Because you're treated as owning your share of a property that's subject to a loan, your share of that loan generally counts as debt you took on. The Form 8824 instructions note that "A nonrecourse liability is generally treated as assumed by the party receiving the property subject to the liability."

The trust can't change its loan

Here's the trade-off. Rev. Rul. 2004-86 says the trustee "may not renegotiate the terms of the debt used to acquire" the property. In practice, a DST can't refinance, take out a second loan, or extend a maturity it wasn't already allowed to extend.

So the loan you buy into is the loan you live with. That's why every loan term deserves a close read before you invest.

Is buying into a DST the same as a loan assumption?

People often ask this, and the answer is no.

In a loan assumption, you buy a property and take over the seller's existing mortgage. You usually have to qualify with the lender. You usually sign an assumption agreement. And you may become personally liable, depending on the loan.

In a DST, you don't assume anything personally. You buy an interest in a trust that already owns a property subject to a loan. The trust stays the borrower.

For tax purposes, both can count as debt you've taken on. The day-to-day experience is very different.

What lender terms should you look for in a DST loan?

Every DST offering document describes its loan. These are the terms I look at first, in plain English.

Loan-to-value

How much of the price was borrowed. Higher LTV replaces more debt per dollar of your equity. It also leaves less room before a drop in value wipes out your equity.

Interest rate and whether it's fixed

Many DST loans have a fixed rate. A floating rate can rise with the market, and the trust can't refinance to fix it. If a DST has a floating rate, I want to know what protects it, such as a rate cap the sponsor bought. A rate cap is a contract that limits how high the rate can go.

Interest-only period

Many DST loans are interest-only for some or all of the term. Interest-only means you pay interest but no principal. That helps cash flow. It also means the loan balance doesn't go down, so all of it is still owed at maturity.

Maturity versus the projected hold

This is the one I care about most. A DST can't refinance, so the loan's maturity date sets a hard limit on how long the sponsor can wait to sell. If the loan matures in year 10 and the plan is to sell in year 10, there's no cushion. I like to see some gap between the projected sale and the maturity, or an extension option in the loan. My guide on the DST full cycle and your exit options covers what happens when a DST sells.

Prepayment terms

Many fixed-rate loans charge a large fee to pay off early, or require a costly process to release the loan. If prepayment is expensive, the sponsor may wait out a good selling window. Ask what it would cost to sell in year 5 versus year 9.

Cash management triggers

Lenders often control the property's rent through a lender account. If income falls below a coverage test, the lender can hold back cash instead of letting it go to investors. Debt service coverage is the property's net income divided by its loan payments. When it drops below the lender's threshold, distributions can be cut even if the loan isn't in default. This is one way distributions can be reduced in a leveraged DST.

Reserves

Because the trust can't raise new money, the sponsor sets aside reserves at the start. A leveraged DST with thin reserves has fewer ways to handle a surprise.

Leveraged vs. all-cash DSTs: which fits you?

Neither one is better in general. They do different jobs. Here's how they compare.

Here's how I think about the choice.

An all-cash DST may fit if:

• You sold a property with little or no debt.
• You're willing to add outside cash to cover the debt you paid off.
• You want to avoid loan risk, lender cash controls and maturity risk.
• You're pairing it with a leveraged piece and want to keep total risk moderate.

A leveraged DST may fit if:

• You need to replace a meaningful amount of debt.
• You don't want to add outside cash, or you don't have it.
• You understand that debt magnifies losses and can cut distributions.
• The loan terms fit the business plan, with room at maturity.

What leverage does to your equity

This is a hypothetical example with round numbers. It doesn't represent any offering.

Say three trusts each buy a $10,000,000 property. One uses no debt, one borrows $5,000,000, and one borrows $8,500,000. Then the value moves.

I've ignored costs, fees and loan paydown to keep it simple. The point is the shape. The higher the LTV, the faster your equity moves in both directions.

A worked example: blending DSTs to replace debt

This is a hypothetical example with simple numbers. It isn't tax advice, and your CPA should run your real figures.

The sale

Say you sell an apartment building for $3,000,000. Selling costs are $150,000. Your loan payoff is $1,350,000.

Your target LTV is $1,350,000 ÷ $2,850,000 = about 47.4%.

Option 1: One DST at 50% LTV

You put all $1,500,000 into one DST with a 50% LTV.

• Your share of the property: $1,500,000 ÷ 0.50 = $3,000,000
• Your share of the debt: $1,500,000

Both targets are met. But everything rides on one property, one sponsor and one loan.

Option 2: An all-cash DST plus a higher-leverage DST

Say you want some money in an all-cash DST. You put $500,000 there. You put the other $1,000,000 into a DST with a 60% LTV.

Both targets are met again. You've split across two properties, and a third of your money carries no loan. But the leveraged piece now carries more risk on its own.

Option 3: Two DSTs at moderate leverage

You split $750,000 into each of two DSTs, one at 45% LTV and one at 50% LTV.

Both targets are met, but only just. The margin is $13,636 on value and $13,636 on debt. That's close enough that I'd want your CPA to confirm the final figures before you commit. A small change in the final closing numbers could leave a gap.

What if you fall short?

Say you put all $1,500,000 into DSTs with a blended LTV of 40%. You'd buy $2,500,000 of property with $1,000,000 of debt. You're $350,000 short on both value and debt. That $350,000 could be taxable as mortgage boot, up to your gain, unless you add $350,000 of outside cash.

What is a zero-coupon DST?

A zero-coupon DST is a DST built with very high debt, often close to the property's value. It's designed mainly to help owners replace a large mortgage with a small amount of cash. The name borrows from zero-coupon bonds, which pay nothing along the way. In the same spirit, a zero-coupon DST usually pays investors little or no cash distribution.

My DST guide calls these "high-leverage" or "zero cash flow" DSTs. They're a niche tool, and I'd never treat them as an everyday investment.

How the structure usually works

Zero-coupon DSTs often share a few traits:

• One tenant on a long net lease. A net lease is one where the tenant pays taxes, insurance and upkeep on top of rent. The lease often runs 20 years or more.
• A loan sized to the rent. The rent is set to cover the loan payments, with little or nothing left over.
• A loan that pays down over the lease. Often the loan amortizes, meaning it pays down principal, over roughly the lease term.
• Little or no distribution. Because the rent goes to the lender, investors usually get little or no cash.

The idea is that, if everything goes to plan, the loan shrinks over time. By the end of the lease, much of the property's value could belong to investors. If the property then sells for a good price, investors could receive a large payout at once. None of that is assured.

Who considers them

The typical case is an owner whose debt is high compared with their equity. That often happens after a cash-out refinance, or after decades of rising values and refinancing.

As a hypothetical, say you sell a property for a $4,000,000 net price with a $3,000,000 loan. You have only $1,000,000 of cash, and your target LTV is 75%. Moderately leveraged DSTs can't get you there. Your choices are to buy a direct property with a large loan, add a lot of outside cash, accept a large amount of taxable boot, or use a high-leverage DST for part of the exchange.

Phantom income

This is the part people miss. A zero-coupon DST can produce taxable income with no cash to pay the tax. People call that phantom income.

Here's why. Rent counts as income. Interest and depreciation are deductions. But paying down loan principal isn't a deduction. As the loan pays down, the interest part of each payment shrinks and the principal part grows. Your deductions fall, while the rent stays about the same. So taxable income rises, even though your cash stays near zero.

A worked example of phantom income

This is a hypothetical example with simple numbers. It doesn't represent any offering, and it isn't tax advice.

Say you put $150,000 into a zero-coupon DST at 85% LTV. Your share is $1,000,000 of property with $850,000 of debt. The loan is at 5.5% and fully pays down over 20 years. The rent is about $71,127 a year, just enough to make the loan payment. Assume $800,000 of your share is building, depreciated straight-line over 39 years. That's about $20,513 a year. To keep it simple, I'm treating your basis as new. In a real exchange, your carried-over basis would change the numbers.

By year 15, you'd report about $31,000 of income with no cash from the DST to pay the tax. You'd pay it from other money. Your CPA can tell you how passive loss rules and your other income affect the actual bill.

The foreclosure problem

The biggest risk is the tenant. If the tenant leaves or stops paying, there may be nothing to cover the loan. The trust can't raise new money or easily sign a new tenant. The lender may take the property.

If that happens, you can lose all of your equity. You can also owe tax with no cash in hand. IRS Publication 4681 explains that when a lender forecloses on property securing a nonrecourse loan, "the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property." The Treasury rule at 26 CFR 1.1001-2 says the same thing about liabilities you're discharged from.

Here's a hypothetical. Say the tenant leaves in year 5, and the lender forecloses. Your share of the loan is about $714,000. Say your adjusted basis in your share is $400,000, because you carried a low basis over from your old property. Your amount realized is about $714,000, so your gain is about $314,000. That gain can be taxable, even though you lost your $150,000 and received nothing.

That's why I treat zero-coupon DSTs as a tool for a narrow job. Even then, I'd usually use one for only part of an exchange.

Zero-coupon DST vs. a regular leveraged DST

How to plan your 1031 debt replacement, step by step

Here's the process I use with clients. It works whether you end up in DSTs, a direct property, or both.

Step 1: Get your payoff figure early

Ask your lender for a payoff estimate as soon as you list your property. Note any prepayment penalty and accrued interest separately; they aren't part of the loan balance, and your CPA will tell you how to treat them. The loan balance paid off is your starting debt target.

Step 2: Figure out your net sale price and cash

Subtract expected selling costs from your sale price. That's your value target. Subtract the loan payoff from that. That's the cash your qualified intermediary will hold.

Step 3: Calculate your target LTV

Divide your loan payoff by your net sale price. That's the blended leverage your replacements generally need, unless you'll add cash.

Step 4: Decide how much leverage you're comfortable with

This is a personal question, not a math one. If your target LTV is 60% and you'd sleep better at 30%, you have choices. You can add outside cash, accept some taxable boot, or split the difference. Paying some tax can be a reasonable price for less risk.

Step 5: Build a mix

Shortlist replacement options and run the totals. Many clients use one leveraged DST and one all-cash DST. Others add a direct property. Lower minimums make blending easier.

Step 6: Read every loan term

For each leveraged DST, check the LTV, rate, interest-only period, maturity, prepayment terms, cash management triggers and reserves. Compare the maturity with the projected hold.

Step 7: Identify within 45 days

Send your written list of replacement properties to your QI by day 45. The Treasury rules at 26 CFR 1.1031(k)-1 allow up to three properties of any value, or more if their total value is no more than 200% of what you sold. My guide to the 1031 identification rules explains the options. List a backup in case an offering fills up.

Step 8: Confirm the final numbers before closing

Ask your QI and escrow officer for draft closing statements. Small items paid from exchange funds, like loan fees or prorations, can create cash boot. Have your CPA confirm both the value and debt totals.

Step 9: Close within 180 days and report it

Close on everything by day 180, or by your tax return due date (including extensions) if that comes first. Report the exchange on IRS Form 8824, which the IRS says is used "to report each exchange of business or investment property for property of a like kind."

Mistakes to avoid with 1031 debt replacement

Here are mistakes to watch for.

1. Thinking "I reinvested all my cash" means no tax. If your replacement has less debt and you didn't add cash, the gap can be taxable.
2. Picking an all-cash DST without running the debt math. It may be a fine investment, but on its own it replaces no debt.
3. Trying to fix cash boot with a bigger loan. New debt offsets debt relief, not cash you took out.
4. Refinancing right before the sale. Pulling cash out just before an exchange can raise questions. My partial exchange guide, linked above, covers that risk.
5. Choosing a DST only to avoid boot. If you wouldn't want the investment on its own merits, paying some tax may cost less than the risk.
6. Ignoring the loan maturity. A loan that comes due in a weak market can force a sale at a poor price.
7. Missing the cash management terms. Lender tests can cut distributions even when the loan isn't in default.
8. Underestimating zero-coupon risks. Phantom income and the foreclosure tax problem are real. Read those risk factors closely.
9. Cutting the math too close. Leave a small cushion on both value and debt, since final closing numbers can shift.
10. Forgetting the exit. When a leveraged DST sells, your share of the loan payoff is debt relief again. Your next exchange will face the same question. A DST might instead roll into a REIT. A REIT, or real estate investment trust, is a company that owns many properties, usually through an operating partnership that holds the buildings. When that partnership buys a DST property for units, debt shifts in a different way, which my 721 exchange guide explains with numbers.
11. Skipping your advisors. Debt replacement is a tax question. Confirm your numbers with your CPA, attorney and QI.

What are the risks of using DST debt?

DST interests are securities, and leveraged ones add their own risks. These are the main ones.

• Loss of principal. Property values can fall. Debt magnifies the loss, and you can lose your entire investment.
• Distributions are not guaranteed. They can be reduced or stopped, including by lender cash management rules.
• Maturity risk. The trust can't refinance. A loan coming due at a bad time can force a sale or a springing LLC conversion. That's a clause that lets the trust convert to an LLC, which can then refinance. A conversion can end your ability to do your own 1031 exchange later.
• Foreclosure and tax. If the lender takes the property, you can lose your equity and still owe tax, because the unpaid loan counts as an amount you received on the foreclosure.
• Phantom income. High-leverage structures can create taxable income with little or no cash.
• Illiquidity. There's no public market. The SEC's bulletin on private placements says investors "should be prepared to hold the securities indefinitely."
• Limited control. You have no say in property decisions or lender negotiations.
• Reliance on the sponsor. The sponsor manages the loan relationship and usually signs the carve-out agreement.
• Fees. Up-front and ongoing fees reduce returns. Notice to Members 05-18 from NASD (now FINRA), written about similar fractional real estate, told firms to consider "whether the fees and expenses associated with TIC transactions outweigh the potential tax benefits."
• Tax-law change. The rules here reflect current law and could change.

Most DSTs are sold only to accredited investors. Under the SEC's rules, an individual generally qualifies with income above $200,000 in each of the past two years ($300,000 with a spouse or spousal equivalent), or net worth above $1 million not counting a primary home.

How I review DST debt before I show you an offering

My background is in applied mathematics and applied statistics, which I studied at Babson College. I spent years in real estate acquisitions, management and development at ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners and Arbor Bay Capital Partners. I've been involved in more than $10 billion of real estate investment activity.

I offer DSTs from more than 20 institutional sponsors. My team and I review each one across five areas, with outside auditors in each:

1. Broker-dealer review
2. Investment manager audit
3. Investment offering review
4. Real estate assessment
5. Institutional underwriting

The review is continuous, not a one-time check. When we meet, we start with your debt and value targets. Then we review options together. I tell you why I'm considering each one, what I like, and where I have reservations. You can see the offerings I currently have available when you're ready.

Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

What my data shows

Here's what my offering records as of October 2026 show, across 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They aren't a forecast or a promise about any future offering.

Nearly half of DSTs carry no debt

The number that matters most for debt replacement is this one: 36 of 76 offerings (47%) are all-cash, with no loan at all. If you need to replace a mortgage, close to half of the offerings I track won't help on the debt side by themselves.

Only about a fifth of offerings sit above 50% LTV

If your old property carried a bigger loan compared with its value, you'll likely need a higher-leverage piece, outside cash, or both. Only 16 offerings (21%) sit above 50% LTV. These figures don't single out zero-coupon programs.

Minimums make blending possible

The median minimum investment is $100,000. Minimums range from $25,000 to $500,000, and 21 offerings (28%) start at $25,000. Lower minimums make it easier to blend an all-cash DST with a leveraged one to hit both targets.

Holds and loan maturities

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. Hold periods are projections, not promises. In a leveraged DST, the loan's maturity often sets the outer limit.

Frequently asked questions

What is debt replacement in a 1031 exchange?

It's making up for the mortgage paid off when you sold. You take on at least as much new debt on your replacement property, or add your own cash to cover the gap. If you don't, the drop in debt can be taxed as boot, up to the amount of your gain.

Can I replace debt with cash in a 1031 exchange?

Yes. Cash you add from outside the exchange offsets debt you were relieved of. You can buy all-cash replacement property as long as you add enough of your own money to cover the debt you didn't replace.

Does a DST loan count toward 1031 debt replacement?

Generally, yes. Because a properly structured DST is treated as a grantor trust, you're treated as owning your share of the property and the loan on it. Your share of that loan generally counts as debt you took on.

Do I have to qualify for a DST loan?

No. The trust is the borrower, and the sponsor arranged the loan, so you don't apply for it, sign it or back it personally. You still need to meet the offering's investor requirements, which usually means being an accredited investor.

Am I personally liable for a DST loan?

Generally, no. DST loans are usually non-recourse to investors, and any carve-out liability falls on the sponsor or an affiliate. You can still lose all of the money you put in.

What is a zero-coupon DST?

It's a DST built with very high debt, usually with one tenant on a long lease whose rent covers the loan payments. It helps owners replace a large mortgage with little cash. It usually pays little or no distribution and carries serious risk if the tenant leaves.

What is phantom income in a zero-coupon DST?

It's taxable income with no cash to go with it. As the loan pays down, interest deductions shrink while rent stays about the same, so taxable income rises. You'd pay the tax from other money.

Does an all-cash DST have less risk than a leveraged one?

An all-cash DST removes loan risk, such as maturity and lender cash controls, but it still carries real estate risk, and it replaces no debt. You can still lose money if the property loses value or tenants leave. Whether it fits depends on your debt target and your comfort with risk.

How do I calculate the LTV I need for my exchange?

Divide the debt paid off at your sale by your net sale price. In a hypothetical case where you paid off $900,000 on a $2,280,000 net sale, you need a blended LTV of about 39.5% across your replacements, unless you add cash.

Can I use more than one DST to replace my debt?

Yes. Many investors blend an all-cash DST with a leveraged one, or add a direct property. Each one must be identified within 45 days and closed within 180 days, and the totals need to meet your value and debt targets.

What happens to my debt when a leveraged DST sells?

The trust pays off the loan, and your share of that payoff is debt relief again. If you want to do another 1031 exchange, you'll generally need to replace that debt or add cash in your next exchange.

Does debt matter if my DST later converts into a REIT?

Yes. If a REIT's operating partnership buys the DST property for units under Section 721, your share of debt changes. A large enough drop in your share of debt can create taxable gain even without cash, so ask the sponsor how the operating partnership assigns debt to incoming investors.

Before you act

This guide is for education only. It isn't tax, legal or investment advice. Please confirm every decision with your CPA, attorney and qualified intermediary. DST interests are offered only by private placement memorandum to qualified investors, 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)
• 26 CFR § 1.1031(d)-2, Treatment of assumption of liabilities (Cornell LII)
• 26 CFR § 1.1031(k)-1, Treatment of deferred exchanges (Cornell LII)
• 26 CFR § 1.1001-2, Discharge of liabilities (Cornell LII)
• IRS Revenue Ruling 2004-86
• IRS Instructions for Form 8824, Like-Kind Exchanges
• IRS, About Form 8824, Like-Kind Exchanges
• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
• IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Code Section 1031
• Investor.gov, Private Placements under Regulation D
• Investor.gov, Updated Investor Bulletin: Accredited Investors
• FINRA (NASD) Notice to Members 05-18