1031 Exchange and DST Glossary: 124 Terms in Plain English

The short answer

A 1031 exchange lets you defer capital gains tax and depreciation recapture when you sell investment real estate and buy other investment real estate, following strict IRS rules on timing, identification and reinvestment. Much of the confusion comes from vocabulary, which is why this glossary exists: "boot" is taxable value you receive, "basis" is your tax cost, a "QI" holds your money, and a "DST" is a trust that lets you own a fraction of a large property as a replacement. This glossary defines the terms you'll meet in an exchange, a DST or 721 offering, and the loan documents behind them.

How to use this glossary

Terms are alphabetized, with numbered terms (like the 45-day rule) first. Where a term has its own guide, I link to it. Where I have an opinion, I give it. Tax figures are current as of October 2026 and can change. Nothing here is tax or legal advice for your situation; confirm specifics with your CPA or tax attorney and your qualified intermediary.

0–9

3-property rule

The most common way to identify replacement property. Within 45 days of selling, you can identify up to three properties of any value and buy one, two or all three. It's simple and it's what I'd use unless you have a reason not to. If you need more options, look at the 200% rule. See 1031 Identification Rules.

45-day identification period

The window, starting the day your relinquished property closes, in which you must identify replacement property in a signed written notice to your qualified intermediary or another permitted party. Day 45 is a calendar day, not a business day, and the IRS doesn't extend it for weekends or holidays. Missing it ends the exchange. IRS disaster relief after a federally declared disaster is the main exception.

95% rule

A fallback identification rule. If you identify more properties than the 3-property or 200% rule allows, the exchange still works if you actually acquire at least 95% of the total value of everything you identified. In practice that means buying nearly all of it. I treat this rule as a rescue, not a plan.

180-day exchange period

You must close on your replacement property by the earlier of 180 calendar days after selling or the due date (with extensions) of your tax return for the year of the sale. The second limit catches people who sell in the fall: a November sale can hit the April 15 return deadline first unless you extend your return.

200% rule

An identification option that lets you name any number of properties as long as their combined fair market value doesn't exceed 200% of what you sold. If you sold for $2 million, you can identify $4 million of property in total. It's popular with DST investors who want to spread money across four or five offerings.

721 exchange

A contribution of property to a partnership in exchange for a partnership interest, tax-deferred under IRC §721. In real estate it usually means contributing property or DST interests to a REIT's operating partnership for OP units, often called an UPREIT transaction. Once you're in OP units, you can't go back to a 1031 exchange with that capital. See the 721 exchange guide.

1031 exchange

A transaction under IRC §1031 in which you sell real property held for investment or business use and acquire other like-kind real property, deferring the capital gains tax and depreciation recapture you'd otherwise owe. It defers tax; it doesn't forgive it. Since 2018, only real property qualifies. See 1031 Exchange Rules and Timeline.

1033 exchange

Deferral of gain under IRC §1033 when property is involuntarily converted, through condemnation, threat of condemnation, casualty or theft, and you reinvest the proceeds in similar property (or like-kind real estate, for condemned business or investment real property). The replacement period is longer than in a 1031 (two years, or three for condemned business or investment real estate), and no intermediary is required. See Section 1033 Involuntary Conversions.

A

Accommodator

Another name for a qualified intermediary, the independent party that holds your sale proceeds and documents the exchange so you never have access to the money. You'll also hear "exchange facilitator." The title doesn't matter; the safeguards on your funds do. See Choosing a Qualified Intermediary.

Accredited investor

A person or entity that meets an SEC test under Rule 501(a) of Regulation D: for individuals, generally $200,000 of income ($300,000 joint) in each of the last two years with the same expected this year, or $1 million of net worth excluding the primary residence. DSTs are generally sold only to accredited investors. See Accredited Investor Requirements.

Acquisition fee

A fee a DST sponsor or its affiliate charges for finding, underwriting and buying the property, usually a percentage of the purchase price and paid from investor equity. It's disclosed in the PPM. I always add it to the other up-front costs, because what matters is how much of your dollar actually ends up in real estate.

Adjusted basis

Your tax cost in a property after adjustments: what you paid, plus closing costs and capital improvements, minus depreciation and certain other items. When you sell, gain is sale price (less selling costs) minus adjusted basis. In an exchange, your old adjusted basis carries into the replacement property, which is how the deferred gain follows you.

Alternate valuation date

An executor's option under IRC §2032 to value an estate six months after death instead of on the date of death. It's available only if it reduces both the gross estate and the estate tax, so most estates under the exemption can't use it. It matters to 1031 investors because it also sets the heirs' stepped-up basis.

Asset management fee

An ongoing fee a DST sponsor charges to oversee the property and the trust, often a percentage of revenue or of equity. It's paid before any distributions to investors. It's ordinary, but compare it across offerings; small differences in ongoing fees add up over a seven-year hold.

B

Balloon payment

The large remaining principal due when a loan matures, because the scheduled payments didn't fully pay it off. Most commercial real estate loans, including most DST loans, end in a balloon after five to ten years. If the property can't be sold or refinanced when it comes due, investors have a real problem.

Basis

Your starting tax cost in an asset, usually what you paid plus acquisition costs. It's the number subtracted from the sale price to compute gain. Real estate investors usually mean adjusted basis, which reflects improvements and depreciation. Property you inherit generally gets a new basis at fair market value; property you receive as a gift keeps the giver's basis.

Beneficial interest

What you actually own in a DST: a fractional interest in the trust, not a deed to the real estate. For federal income tax purposes, under Revenue Ruling 2004-86, a properly structured DST is treated as a grantor trust, so the IRS treats you as owning a share of the real estate, which is why it qualifies for a 1031 exchange.

Blue sky laws

State securities laws. For most DST offerings sold under Rule 506 of Regulation D, states can't require registration of the offering itself but can require a notice filing and a fee. The name dates to the early 1900s and laws aimed at schemes that had "nothing behind them but the blue sky."

Bonus depreciation

A first-year deduction for a percentage of the cost of qualifying property with a recovery period of 20 years or less. The One Big Beautiful Bill Act restored 100% bonus depreciation permanently for qualifying property acquired after January 19, 2025. Buildings themselves don't qualify, but components identified in a cost segregation study often do.

Boot

Anything you receive in an exchange that isn't like-kind property: cash, debt relief that isn't replaced, or non-real-estate property. Boot is taxable to the extent of your gain. The two kinds people mention are cash boot and mortgage boot. See Partial 1031 Exchanges and Boot and the boot calculator.

Broker-dealer

A firm registered with the SEC and a member of FINRA that can sell securities and earn commissions. DST interests are securities, so they're sold through broker-dealers and their registered representatives. Baker 1031 offers securities through Aurora Securities, Inc., member FINRA/SIPC. A real estate license alone doesn't permit someone to sell DST interests.

Build-to-suit exchange

Also called an improvement or construction exchange. An exchange accommodation titleholder holds the replacement property while improvements are built using exchange funds, so the value of the improvements counts as replacement property. Only work completed by day 180 counts. It works, but it's tight, and construction schedules rarely run early.

C

Capital gains tax

Federal tax on the gain from selling an asset held more than a year, at 0%, 15% or 20% depending on income. In 2026 the 20% rate starts above $545,500 of taxable income for single filers and $613,700 for joint filers. Add 3.8% NIIT for many investors and state tax; California taxes gains as ordinary income, up to 13.3%.

Capitalization rate (cap rate)

A property's net operating income divided by its price. A building with $500,000 of NOI selling for $10 million trades at a 5% cap rate. Cap rates describe pricing, not your return; your return depends on debt, fees, the price you exit at and what happens to the rent. I'd treat a cap rate as a starting question, never an answer.

Carryover basis

When the recipient of property takes the previous owner's basis rather than a new one. Gifts generally get carryover basis under IRC §1015, which means the recipient inherits the giver's deferred gain. It's the main reason gifting low-basis exchange property during life is usually worse, tax-wise, than leaving it at death. See Step-Up in Basis.

Carve-outs (bad-boy carve-outs)

Exceptions to a non-recourse loan that make the borrower or a guarantor personally liable for certain acts, such as fraud, misapplied funds, unpermitted transfers or a voluntary bankruptcy. In a DST, the sponsor or an affiliate usually signs the carve-out guaranty, not the investors. Read who is on the hook; it tells you how much the sponsor has at stake.

Cash boot

Cash or cash-equivalents you receive from an exchange, including proceeds the QI pays out to you or money from the sale used for non-exchange costs, like loan payoffs on other property or security deposit credits. Cash boot is taxable up to your gain. Unlike mortgage boot, you can't offset cash you receive by taking on more debt.

Cash-on-cash return

Annual cash distributions divided by the equity invested. If you invest $100,000 and receive $5,000 in a year, that's 5% cash-on-cash. It ignores appreciation, loan paydown and the value at sale, and in a DST it doesn't tell you how much of your equity went to fees. Treat any stated figure as a hypothetical.

Community property

A system of marital property law in nine states, including California, where property acquired during marriage generally belongs equally to both spouses. Under IRC §1014(b)(6), both halves of qualifying community property can get a new basis at the first spouse's death. Holding title as joint tenancy instead can cost a surviving spouse half that benefit.

Constructive receipt

The tax principle that you're treated as having received money if it was available to you, even if you didn't take it. In an exchange, constructive receipt of the proceeds kills the deferral, which is why a qualified intermediary holds the money and why the exchange agreement restricts your access to it.

Cost segregation

An engineering study that splits a building's cost into components with shorter recovery periods (5, 7 and 15 years) instead of the 27.5 or 39 years for the structure. It accelerates depreciation, often with bonus depreciation. The trade-off: accelerated depreciation on those components can be recaptured as ordinary income if you sell outside an exchange.

D

Dealer property

Property held primarily for sale to customers, like lots a developer subdivides or houses a flipper renovates. It doesn't qualify for a 1031 exchange, because it isn't held for investment or business use. The line between investor and dealer depends on facts: frequency of sales, intent, improvements and marketing.

Debt replacement

The principle that to fully defer tax, you generally need to replace the debt paid off on the property you sold, either with new debt on the replacement or with additional cash. If you sell with a $900,000 loan and buy with a $600,000 loan and don't add $300,000 of cash, the $300,000 difference is mortgage boot.

Debt service coverage ratio (DSCR)

Net operating income divided by annual loan payments. A property with $1.3 million of NOI and $1 million of debt service has a DSCR of 1.30. Lenders set minimums, and loans often include cash management triggers if DSCR falls below a set level, which can cut off distributions to DST investors.

Defeasance

A way to pay off a fixed-rate loan early, common with CMBS loans, by replacing the property as collateral with a portfolio of Treasury securities that produces the remaining scheduled payments. It's expensive when interest rates have fallen since the loan was made and cheaper when they've risen. DST sales can be delayed or priced around it.

Delaware Statutory Trust (DST)

A trust formed under Delaware law that holds title to real estate and sells beneficial interests to investors. Structured under Revenue Ruling 2004-86, an interest qualifies as like-kind replacement property for a 1031 exchange. Investors give up control and liquidity in exchange for passive, fractional ownership. See the Complete DST Guide.

Depreciation

An annual deduction for the wear and obsolescence of a building and its improvements: 27.5 years for residential rental property and 39 years for nonresidential, straight-line. Land isn't depreciable. Depreciation lowers your taxable income each year and your adjusted basis, which increases the gain when you eventually sell.

Depreciation recapture

The portion of your gain attributable to depreciation you took, taxed differently from the rest of the gain. For most buildings it's "unrecaptured §1250 gain," taxed federally at up to 25%. For personal property and cost-segregated components (§1245 property), it's ordinary income. A 1031 exchange defers it. See Depreciation Recapture Explained.

Disposition fee

A fee a DST sponsor or its affiliate earns when the property sells, usually a percentage of the sale price. Some sponsors also take a share of profits above a target return. Read the PPM so you know who gets paid what at the end, and whether the sponsor's incentives line up with yours on timing.

Disqualified person

Someone who can't act as your qualified intermediary under the Treasury regulations: generally your agent within the last two years (your attorney, accountant, real estate broker or employee, among others) and certain related parties. Routine title, escrow and exchange services don't make someone a disqualified person.

Distribution

A payment from a DST, REIT or partnership to investors, usually monthly or quarterly from net cash flow. Distributions are not guaranteed and can be reduced or suspended. Part of a distribution may be sheltered from current tax by depreciation. A high distribution figure tells you nothing about whether the property is healthy.

Drop and swap

A technique where a partnership or LLC distributes property to its members as tenants in common ("drop") so each can do a separate exchange or cash out ("swap"). The risk is the held-for-investment requirement: dropping right before a sale invites IRS challenge. It's tax-attorney territory and timing matters.

Due diligence

The investigation of a property, a sponsor and an offering before investing: leases, tenants, physical condition, environmental reports, title, loan terms, fees and the sponsor's history. Broker-dealers must perform reasonable diligence on private placements they recommend. I'd ask any adviser what they actually reviewed and what they turned down.

E

Earnest money

A deposit a buyer puts down when signing a purchase contract. If you're the buyer in an exchange, the deposit for the replacement property can come from exchange funds if your QI's procedures allow it. If you pay it personally, a reimbursement from exchange funds at closing can be treated as cash to you, so ask your CPA first. Coordinate with your QI before you wire anything.

Equal or greater rule

Shorthand for what it takes to fully defer tax: buy replacement property whose value is equal to or greater than what you sold (net of selling costs), and reinvest all of your net cash. Spending less creates boot. Spending more is fine and is called trading up.

Escrow

A neutral third party holding funds and documents until the conditions of a sale are met. In an exchange, closing escrow and the qualified intermediary are different roles. The escrow company closes the sale; the QI holds your proceeds between the sale and the purchase. Proceeds shouldn't pass through your hands at any point.

Estate tax exemption

The amount you can leave at death (and give during life) without federal estate or gift tax. For 2026 it's $15 million per person under the One Big Beautiful Bill Act, indexed for inflation in later years, with no scheduled expiration. The top estate tax rate is 40%. Congress can change the number.

Exchange accommodation titleholder (EAT)

The entity, usually an affiliate of a qualified intermediary, that takes title to property in a reverse or build-to-suit exchange under Revenue Procedure 2000-37. The EAT "parks" the property for up to 180 days while you complete the other half of the exchange. It's an added cost and paperwork, so plan for both.

Exchange agreement

The contract between you and your qualified intermediary, signed before your relinquished property closes. It assigns the sale contract to the QI and restricts your access to the funds as the Treasury regulations require. Read the sections on how funds are held and what happens if the QI fails.

Exchange expenses

Costs you can pay from exchange funds without creating taxable boot, generally ordinary closing costs like commissions, title, escrow, recording and QI fees. Loan costs, property tax prorations, security deposits and rent credits are often treated differently. Ask your CPA how your closing statement items will be treated before closing, not in April.

F

Fair market value

The price a willing buyer and a willing seller would agree on, both knowing the relevant facts and neither forced to act. It sets your heirs' basis at death, your identification limits under the 200% rule and your net worth for accredited investor purposes. For a DST interest, there's no market price, so it's an estimate.

Fee simple

Full ownership of real property, the most complete form of ownership. A fee simple interest in rental property is like-kind to a fee interest in almost any other U.S. investment real estate. A leasehold with 30 or more years remaining, including renewal options, is generally treated as equivalent to fee simple for a 1031 exchange.

FINRA

The Financial Industry Regulatory Authority, the self-regulatory organization that oversees broker-dealers and their registered representatives under SEC supervision. FINRA writes rules on communications (including educational content like this glossary), suitability and private placement due diligence. You can check a representative's record on FINRA BrokerCheck.

FIRPTA

The Foreign Investment in Real Property Tax Act, which generally requires a buyer to withhold 15% of the gross sale price when the seller is a foreign person. It matters in exchanges with foreign sellers or buyers. Foreign investors face additional limits; Baker 1031 works only with U.S. citizens and permanent residents.

Form 593

The California Franchise Tax Board form used for real estate withholding. Buyers generally withhold 3⅓% of the sale price on California real estate sales unless an exemption applies. A seller doing a 1031 exchange can claim an exemption on the form, with any withholding later required on boot.

Form 3840

The California Franchise Tax Board form that taxpayers who exchange California property for property outside California must file every year until they recognize the deferred gain. California keeps its claim on the gain from the years you owned the California property. Forgetting to file this form is common, and the FTB notices.

Form 8824

The IRS form you file with your return for the year of an exchange to report the like-kind exchange: properties, dates, values, boot and the basis of the replacement property. Your CPA prepares it. Keep your closing statements and QI records; they're what the form is built from.

Form D

A short notice filed with the SEC within 15 days after the first sale in a Regulation D offering. It lists the issuer, the exemption claimed and basic offering information. It's public, but it's a notice, not an SEC approval. The SEC doesn't review or endorse private placements.

G

General solicitation

Offering securities through public advertising or communications to people with whom the issuer or its brokers have no pre-existing relationship. It's prohibited in Rule 506(b) offerings and permitted in Rule 506(c) offerings if every buyer is verified as accredited. It's why our educational pages never name or link to a specific offering.

Gift tax annual exclusion

The amount you can give each recipient each year without filing a gift tax return or using lifetime exemption: $19,000 per recipient for 2026. A married couple can give $38,000 per recipient by splitting gifts. Gifts of appreciated property carry over your basis, which often makes them a poor choice for low-basis exchange property.

Grantor trust

A trust whose income is taxed to the person who created it or is treated as owning it. A properly structured DST is a grantor trust for tax purposes, so investors are treated as owning their share of the real estate directly. That's the foundation of DST eligibility for a 1031 exchange. A revocable living trust is also a grantor trust.

H

Held for investment

The requirement that both the property you sell and the property you buy be held for productive use in a trade or business or for investment. Property held mainly for resale (dealer property) or personal use doesn't qualify. There's no statutory holding period; many advisers suggest at least one to two years, though intent and facts matter most.

Holding period

For capital gains, the time you've owned an asset; more than a year makes gain long-term. In an exchange, your holding period in the old property tacks onto the new. For DSTs, it also refers to the expected hold before the sponsor sells, often five to ten years but not fixed or promised.

I

Identification notice

The signed written document naming your replacement property by day 45, delivered to your qualified intermediary or another permitted party. Real estate needs a legal description or street address; a DST interest is identified by the trust's name and the amount or percentage you plan to buy. Revocations also have to be in writing by day 45.

Improvement exchange

See build-to-suit exchange. The value of improvements made with exchange funds counts toward your replacement property only if they're completed and owned by the EAT before the property is transferred to you, within 180 days.

Income in respect of a decedent (IRD)

Income a person earned but hadn't received or been taxed on before death, such as payments on an installment note. IRD doesn't get a stepped-up basis under §1014(c); the heirs pay income tax on it as it comes in. Sellers who carried back a note sometimes assume it will be treated like inherited property. It isn't.

Installment sale

A sale where at least one payment is received after the year of sale, so gain is reported as payments come in under IRC §453. Seller financing creates one. It can be combined with an exchange in limited ways. Unlike real estate held at death, an installment note doesn't get a step-up, which affects estate planning.

Interest-only loan

A loan with payments of interest only, no principal reduction, for part or all of its term. Many DST loans are interest-only for some or all of the term, which raises cash available for distributions and leaves the full balance due at maturity. It's a structural choice with risks, not a sign of a stronger property.

Investment-grade tenant

A tenant, or its parent company, whose debt is rated BBB− or higher by S&P (or the equivalent by another rating agency). Net lease properties are often marketed on tenant credit. A credit rating can be cut, a lease can be rejected in bankruptcy, and a rating says nothing about whether the building will re-lease when the lease ends.

J

Joint tenancy

Co-ownership with a right of survivorship: when one owner dies, the survivor automatically owns the whole. Between spouses, generally only the decedent's half gets a new basis at the first death. For California couples, community property (or community property with right of survivorship) can give a full step-up instead. Title choices made casually can be expensive later.

L

Like-kind property

Property of the same nature or character, not necessarily the same grade or quality. For real estate the standard is broad: an apartment building, raw land, a DST interest, a warehouse and a 30-year leasehold are all like-kind to each other. U.S. real estate isn't like-kind to foreign real estate, and since 2018 personal property doesn't qualify.

Limited control

A defining feature and risk of DSTs: investors have no vote on leasing, management, financing or sale. Revenue Ruling 2004-86 also bars the trustee from renegotiating leases, taking new loans or accepting new capital. That's what keeps the DST a grantor trust for tax purposes, and it's also what makes a troubled DST hard to fix.

Load

The total up-front costs of a DST or other offering as a share of investor equity: selling commissions, dealer manager fees, offering and organizational costs, acquisition and financing fees and reserves. A 10% load means about 90 cents of your dollar reaches the property. I always calculate the load before I look at anything else in the PPM.

Loan assumption

Taking over the seller's existing loan rather than getting new financing. In a DST, investors effectively step into the trust's loan as a share of the debt, which can help them replace debt for exchange purposes. The loan is usually non-recourse to investors.

Loan-to-value (LTV)

The loan balance divided by the property's value. A $6 million loan on a $10 million property is 60% LTV. Higher LTV means more leverage: more debt to replace for an exchange, magnified gains and losses, and less room before a value decline puts the equity underwater.

Lockout period

A period after a loan closes during which it can't be prepaid at all. CMBS and life company loans often have them, followed by defeasance or yield maintenance. A lockout can prevent a DST from selling early even when selling would make sense.

M

Master lease

A lease in which a single tenant, usually an affiliate of the sponsor, leases the entire property from the DST and subleases to the actual occupants. It's common in multifamily and other multi-tenant DSTs because it lets the master tenant handle the active management the DST trustee can't. The master tenant's financial strength matters.

Master tenant

The entity, often affiliated with the sponsor, that signs a master lease with the DST. It pays rent to the DST and keeps or absorbs the difference between that rent and what the property's tenants pay. Ask how much capital the master tenant has; a thinly capitalized master tenant provides little cushion.

Mortgage boot

Debt relief that isn't replaced, which is taxable like cash. If you pay off a $900,000 loan on the property you sell and the replacement has only a $600,000 loan, you have $300,000 of mortgage boot unless you add $300,000 of your own cash. Adding cash can offset mortgage boot; taking on more debt can't offset cash boot. See Partial 1031 Exchanges and Boot.

N

Net investment income tax (NIIT)

A 3.8% federal tax under IRC §1411 on investment income, including rental income and capital gains, for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). Those thresholds aren't indexed for inflation. Real estate professionals who materially participate may be exempt on rental activity. A 1031 exchange defers the NIIT along with the gain.

Net lease (NNN)

A lease where the tenant pays some or all of the property taxes, insurance and maintenance in addition to rent. In a triple-net (NNN) lease, the tenant pays all three. NNN properties are common in DSTs because they fit the trustee's limited role. "Net" doesn't mean no landlord costs: roofs, structure and vacancy often still fall on the owner.

Net operating income (NOI)

A property's income after operating expenses but before debt service, depreciation and income taxes. It's the base for cap rates and DSCR. Watch which expenses are included; reserves, asset management fees and capital spending can make two NOI figures for the same property look very different.

Non-recourse loan

A loan where the lender's remedy on default is limited to the property; it can't pursue the borrower's other assets, except under the carve-outs. DST loans are generally non-recourse to investors, which caps an investor's loss at their investment. It doesn't mean the investment can't lose everything.

O

Offering and organizational costs

Costs to create and sell an offering: legal, accounting, printing, marketing and due diligence reimbursements. In a DST they're paid from investor equity and are part of the load. They're ordinary, but they're money that doesn't go into the building.

OP units

Units of limited partnership interest in a REIT's operating partnership, received in a 721 exchange. They're generally designed to track the value of REIT shares and can usually be redeemed for shares or cash after a holding period, which is a taxable event. See Operating Partnership Units Explained.

Operating partnership (OP)

The partnership through which an UPREIT owns its real estate. The REIT is the general partner and usually the largest owner. Contributing property to the OP for OP units is what makes a 721 exchange tax-deferred. Decisions inside the OP are controlled by the REIT, not the unit holders.

Opportunity zone

A designated low-income census tract where investing capital gains through a qualified opportunity fund can defer and potentially reduce tax. The 2025 law made the program permanent, with new rules for investments made after 2026: a five-year deferral, a 10% basis increase after five years (30% in rural zones) and potential exclusion of appreciation after ten years.

P

Partial exchange

An exchange where you reinvest less than all of your proceeds or don't fully replace your debt. The shortfall is boot and is taxable, but the rest of the gain stays deferred. A partial exchange can be a deliberate choice when you want some cash and the tax on it is acceptable. See Partial 1031 Exchanges and Boot.

Passive activity

A business activity in which you don't materially participate, which for most investors includes rental real estate and DST interests. Passive losses generally offset only passive income, with suspended losses released when you fully dispose of the activity. A 1031 exchange isn't a full disposition for this purpose.

Primary residence exclusion (§121)

The exclusion of up to $250,000 of gain ($500,000 for married couples) on selling a home you owned and lived in for two of the last five years. It can combine with a 1031 exchange for property that was both a home and a rental, with careful rules. See 1031 Exchanges and a Primary Residence.

Private placement memorandum (PPM)

The disclosure document for a private securities offering. For a DST it describes the property, leases, loan, fees, conflicts of interest, sponsor history and risk factors. It's long, and the risk factors read like boilerplate, but the fee table and the loan section are where the real differences between offerings show up.

Probate

The court process for administering a deceased person's estate. In California it's slow and has statutory attorney and executor fees calculated on the gross estate value. A revocable living trust avoids probate for assets titled in the trust and keeps the step-up in basis.

Q

Qualified exchange accommodation arrangement (QEAA)

The safe harbor under Revenue Procedure 2000-37 for reverse and build-to-suit exchanges. An exchange accommodation titleholder holds title for up to 180 days, with identification within 45 days, and the IRS won't challenge the arrangement if the requirements are met. It's what makes a reverse exchange workable in practice.

Qualified intermediary (QI)

The independent party that enters into the exchange agreement, holds your sale proceeds and transfers them to buy the replacement property, so you never have constructive receipt. QIs aren't federally regulated, and a few have failed or stolen funds. Ask how funds are held, whether accounts are segregated and what bond and insurance coverage they carry. See Choosing a Qualified Intermediary.

Qualified opportunity fund (QOF)

A corporation or partnership organized to invest at least 90% of its assets in opportunity zone property. Investing capital gains in a QOF, within the required period, is how an investor gets opportunity zone tax benefits. Unlike a 1031, only the gain needs to be invested, not the full proceeds.

R

Real estate investment trust (REIT)

A company that owns or finances income-producing real estate and must distribute most of its taxable income. Shares of a REIT are not real property, so they're not like-kind for a 1031 exchange; a 721 exchange is the route into one. Non-traded REITs are illiquid; listed REIT shares trade daily and their prices move. See DST vs. REIT.

Recourse loan

A loan where the borrower is personally liable for repayment beyond the property. Many smaller investment property loans and bank loans are recourse or partially recourse. Moving from a recourse loan on property you manage to a non-recourse loan in a DST is a change in risk that some exchangers value.

Regulation D

The SEC rules (17 CFR 230.500–508) that let issuers raise money privately without registering the offering. Rule 506 is the exemption most DSTs use. Regulation D defines accredited investors in Rule 501(a) and requires a Form D notice filing. Private placements aren't reviewed or approved by the SEC.

Family members (siblings, spouse, ancestors, descendants) and entities you control more than 50%, under IRC §1031(f) and §267(b). You can exchange with a related party, but if either party disposes of the exchanged property within two years, the deferral can be lost. Buying replacement property from a related party gets extra IRS scrutiny.

Relinquished property

The property you sell in a 1031 exchange. It must have been held for investment or business use. Its adjusted basis carries into the replacement property. The 45-day and 180-day periods start on the day it closes (or the first one closes, if you sell more than one).

Replacement property

The like-kind property you acquire in a 1031 exchange, identified within 45 days and acquired within 180 days. It can be one property, several, or DST interests. It takes a carryover basis from the relinquished property, adjusted for boot and additional cash or debt.

Reserves

Money set aside from investor equity or property cash flow for future capital needs, leasing costs or shortfalls. DSTs fund reserves up front because they can't raise new capital later. Ask how big the reserves are relative to the property's age and lease expirations; thin reserves are an early warning.

Revenue Ruling 2004-86

The IRS ruling that a properly structured Delaware Statutory Trust is a grantor trust and its beneficial interests are interests in real estate for 1031 purposes. It sets the limits on what the trustee can do, often summarized as the "seven deadly sins." Most of the DST structure exists to stay within this ruling.

Reverse exchange

An exchange where you buy the replacement property before selling the relinquished property. An exchange accommodation titleholder holds one of the properties under Revenue Procedure 2000-37 for up to 180 days. It's more expensive and more complex than a forward exchange. See Reverse 1031 Exchanges.

Revocable living trust

A trust you can change or revoke during life, usually used to avoid probate. For income tax purposes it's disregarded, so it can sell and buy in a 1031 exchange as if it were you. Assets in it are included in your estate and generally get a step-up in basis at death.

S

Safe harbor

A set of conditions that, if met, the IRS or SEC agrees to respect. The Treasury regulations give safe harbors for qualified intermediaries and qualified escrow accounts; Revenue Procedure 2000-37 gives one for reverse exchanges; Rule 506(c) lists verification methods treated as reasonable. Outside a safe harbor, you're relying on facts and arguments.

Section 1014

The Internal Revenue Code section that gives property acquired from a decedent a basis equal to fair market value at death. Under current law, it's why deferred gain from a lifetime of exchanges may never be taxed. Congress has proposed limiting it more than once. See Step-Up in Basis.

Section 1245 property

Generally depreciable personal property and certain other assets, including building components reclassified through cost segregation. Gain up to the depreciation taken is recaptured as ordinary income on a sale. Since 2018, only real property qualifies for a 1031 exchange. Many cost-segregated components are still real property for exchange purposes even though they're §1245 property for depreciation, and that mismatch creates allocation and recapture questions.

Section 1250 property

Depreciable real property, mainly buildings and structural components. True §1250 recapture applies only to depreciation exceeding straight-line, which is rare for buildings placed in service after 1986. The more common tax is on unrecaptured §1250 gain, the straight-line depreciation portion, taxed at up to 25% federally.

Seller financing

When the seller lends part of the price to the buyer and takes back a note. In an exchange, a note received at closing is boot unless it's assigned to the QI and handled with careful planning. Notes don't get a step-up at death. It's a useful tool with traps in both the exchange and estate rules.

Seven deadly sins

Shorthand for the restrictions in Revenue Ruling 2004-86 on a DST trustee: no new capital contributions after the offering closes, no new or renegotiated loans, no reinvesting sale proceeds, no capital improvements beyond normal repairs and those required by law, no holding cash beyond short-term investments, distributions required on a regular basis, and no renegotiating or entering new leases (except in tenant bankruptcy).

Signatory trustee

The trustee of a DST with authority to act for the trust under the trust agreement, usually an affiliate of the sponsor. Its powers are deliberately limited to keep the DST within Revenue Ruling 2004-86. A separate Delaware trustee is typically named to meet state law requirements, with a purely administrative role.

The company that sources the property, structures the DST, arranges the loan, raises the equity and manages the investment, often through affiliates. Sponsor quality is one of the biggest variables in a DST. I look at the sponsor's track record through full cycles, its balance sheet and how it treated investors in properties that went badly.

Springing LLC

A provision in many DST trust agreements that lets the trustee convert the DST into a limited liability company if the trust's restrictions would otherwise threaten the property, for example when a loan needs restructuring or a major lease must be renegotiated. Conversion lets the entity act, but investors become LLC members, which generally ends 1031 eligibility for their next exchange.

Step-up in basis

The reset of an inherited asset's basis to its fair market value at the owner's death under IRC §1014. For a 1031 investor, under current law, it can erase deferred gain and depreciation recapture for the heirs. It can also step down if values fell. See Step-Up in Basis and Estate Planning.

Straight-line depreciation

Depreciation in equal amounts each year over the recovery period: 27.5 years for residential rental buildings and 39 years for nonresidential ones. A $2.75 million residential building generates $100,000 of depreciation a year. It's the method for buildings; accelerated methods apply to shorter-lived components.

Swap till you drop

The strategy of exchanging investment property for life so the deferred gain is never recognized, relying on the step-up in basis at death under current law. For people who would hold real estate anyway, I think it's a sound default. It depends on holding until death, on current law continuing and on keeping enough liquidity outside the real estate.

T

Tenancy in common (TIC)

Co-ownership where each owner holds an undivided fractional interest in the property, with no right of survivorship. Before DSTs became the dominant structure, TIC programs (under Revenue Procedure 2002-22) were the common fractional replacement property. TICs require unanimous decisions on major issues, which caused real problems after 2008.

Trading up

Buying replacement property worth more than the property you sold, by adding cash, taking on more debt or both. Trading up is fine for deferral; the additional investment adds to your basis. Trading down, by contrast, creates boot.

Trustee

In a DST, the party that holds legal title and administers the trust under the trust agreement. DSTs typically have a signatory trustee (affiliated with the sponsor) and a Delaware trustee (administrative). The trustee's limited powers are a feature of the tax structure and a source of investor risk.

U

Unrecaptured §1250 gain

The part of your gain on real property equal to the straight-line depreciation you took, taxed at a federal maximum rate of 25% instead of the 20% capital gains rate. On a long-held building it's often a large number. A 1031 exchange defers it, and under current law a step-up at death eliminates it for heirs.

UPREIT

Umbrella partnership real estate investment trust: a REIT that owns its properties through an operating partnership. That structure lets property owners contribute real estate in a tax-deferred 721 exchange for OP units. Many DST programs are built to be contributed to an affiliated UPREIT at the end of the hold, a feature you should understand before investing. See the 721 exchange guide.

V

Vesting

How you hold title: individually, as joint tenants, as community property, as tenants in common, through a trust or an LLC. On a DST subscription agreement, it's the section that asks how you'll own the interest. It must match the taxpayer that sold the relinquished property, and it has estate tax and basis consequences.

Y

Yield maintenance

A prepayment penalty designed to give the lender the same yield it would have earned if the loan had run to maturity. It's large when rates have fallen since the loan was made and small when they've risen. Like defeasance, it affects when a DST can sell a property and how much investors receive.

Risks and limitations

Many of the terms above describe securities: DSTs, 721 exchanges, OP units, REITs and opportunity zone funds. These investments have real risks that a definition can't capture. They are generally illiquid, and you may not be able to sell when you want. You can lose some or all of your principal. Distributions are not guaranteed and can be reduced or suspended. You rely on the sponsor's judgment and financial condition, and you have limited or no control over the property. Up-front fees and load reduce the amount invested, and ongoing fees reduce any return. Many use leverage, which magnifies losses. Tax benefits depend on current law and IRS guidance, which can change. For 721 exchanges specifically, you give up future 1031 eligibility for that capital, concentrate in one REIT, take on REIT share price volatility, and trigger a taxable event when you convert or sell. Offerings are available only to accredited investors through a private placement memorandum, which describes each offering's risks in full.

Frequently asked questions

What is the difference between a 1031 exchange and a DST?

A 1031 exchange is the tax procedure: selling investment real estate and buying like-kind real estate under IRC §1031 to defer the tax. A DST is one kind of property you can buy as the replacement. It's a trust that owns real estate and sells fractional interests, which Revenue Ruling 2004-86 treats as real estate for exchange purposes. You can do a 1031 without a DST, and many people do.

Is boot always taxable?

Boot is taxable to the extent you have gain on the exchange. If your gain is smaller than the boot, only the gain is taxed. In practice most exchangers have large gains, so boot is usually taxable dollar for dollar. Boot is taxed first as depreciation recapture where applicable, which can mean the 25% federal rate on unrecaptured §1250 gain, then as capital gain. Your CPA reports it on Form 8824.

What does like-kind mean for real estate?

It means real property held for investment or business use exchanged for other real property held for investment or business use. The IRS standard is broad: apartments, land, retail, industrial, DST interests and long-term leaseholds are all like-kind to each other. Two limits matter: U.S. and foreign real estate aren't like-kind to each other, and property held mainly for resale, like a flip, doesn't qualify at all.

What is the difference between recourse and non-recourse debt?

With recourse debt, the lender can pursue your personal assets if the property doesn't cover the loan. With non-recourse debt, the lender's remedy is generally limited to the property, except for carve-outs such as fraud or a voluntary bankruptcy. DST loans are generally non-recourse to investors, and a sponsor affiliate usually signs the carve-out guaranty. Either kind of debt counts when you measure debt replacement in an exchange.

Do I need a qualified intermediary for a 1031 exchange?

For a standard deferred exchange, practically yes. If you or your agent touch the sale proceeds, you have constructive receipt and the exchange fails. The Treasury regulations' qualified intermediary safe harbor is how nearly every exchange avoids that. Your QI can't be your attorney, accountant, broker or employee from the past two years. A 1033 involuntary conversion doesn't require one.

What does load mean in a DST?

Load is the total of the up-front costs in an offering as a percentage of the equity raised: selling commissions, dealer manager fees, offering and organizational costs, acquisition fees, financing fees and funded reserves. It shows how much of your investment actually reaches the property. You'll find the numbers in the PPM's estimated use of proceeds table. I compare load across offerings before anything else.

Can a DST raise more money or refinance if it runs into trouble?

Not while it remains a DST. Revenue Ruling 2004-86 bars the trustee from accepting new capital or taking new or modified loans. That's why reserves are funded up front. Many trust agreements include a springing LLC provision that lets the trustee convert the trust to an LLC to restructure, but investors then hold LLC interests, which generally aren't eligible for a future 1031 exchange.

If a term here raised a question about your own exchange, I'm happy to talk it through with you.