1031 Exchange & DST Investing in Delaware
Delaware taxes capital gains at a top rate of 6.6% and conforms to federal Section 1031. As the home of the Delaware Statutory Trust statute, the state is closely tied to the DST vehicles many exchangers use for passive replacement property.
State tax treatment of a 1031 exchange
Delaware conforms to the federal treatment of Section 1031, so a qualifying like-kind exchange defers Delaware income tax on the gain. Capital gains are taxed as ordinary income at a top marginal rate of 6.6%.
Delaware imposes withholding on the sale of real property by nonresidents, generally at the 6.6% top rate applied to the estimated gain, collected at closing. There is no separate state clawback on gain previously deferred through an exchange.
Market snapshot
Wilmington anchors Delaware's economy as a banking, corporate, and legal hub, and the state's favorable business law makes it the domicile of choice for the Delaware Statutory Trusts widely used in 1031 exchanges. Industrial and logistics product clusters along the I-95 corridor near the ports and airports of the greater Philadelphia region.
Coastal Sussex County, including Rehoboth and Lewes, supports a strong vacation-rental and second-home market. With no state sales tax, Delaware attracts both retail-oriented and residential investment, and multifamily near Wilmington draws steady 1031 replacement interest.
Why 1031 & DST investors look here
- Delaware's 6.6% rate plus federal capital gains tax gives sellers a clear reason to defer rather than recognize gain
- Investors already familiar with the Delaware Statutory Trust structure often use DSTs as ready-made passive replacements
- Coastal and Wilmington-area owners frequently seek to exit direct management while preserving cash flow
Replacement-property options
A Delaware exchange does not require in-state replacement property. Accredited investors can identify DST interests, 721 UPREIT contributions, or Opportunity Zone investments located anywhere in the country, exchanging a single managed property for fractional interests in diversified, professionally operated real estate. These vehicles are illiquid and carry market and sponsor risk, and are limited to accredited investors.
Frequently asked questions
Does Delaware tax a 1031 exchange?
No. Delaware conforms to federal Section 1031, so a qualifying exchange defers Delaware income tax on the gain in addition to the federal deferral.
Can I exchange Delaware property for out-of-state DSTs?
Yes. The replacement property does not need to be in Delaware, so a Delaware property can be exchanged into DST interests holding real estate in other states, subject to accredited-investor rules.
What is a Delaware Statutory Trust?
A DST is a legal entity, created under Delaware law, that holds title to income-producing real estate. Fractional beneficial interests in a DST can qualify as replacement property in a 1031 exchange, giving investors passive ownership.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.