The basic 1031 exchange — sell one property, buy another — works great for active investors who want to keep doing deals. But sometimes investors want different outcomes: passive ownership without management responsibilities, fractional ownership, conversion to REIT shares, or exit strategies that handle complex partnership situations. This is where advanced 1031 strategies come in.

This lesson covers the sophisticated 1031 tools that experienced investors and CPAs use to solve specific situations.

When basic 1031 isn't enough

The standard 1031 exchange works well when:

You have one property to sell
You want one new property that you'll actively manage
You can find suitable replacement in 45 days
You have time to manage the new property

But it doesn't work when:

You're tired of managing properties
You can't find replacement in time
You want diversification
You're in a partnership with different objectives
You want institutional-quality assets you couldn't otherwise own
You want to retire from active management

For these situations, advanced strategies provide solutions.

Delaware Statutory Trusts (DSTs)

A DST is a specific structure that allows multiple investors to own undivided interests in real estate while qualifying for 1031 exchange treatment.

The basic concept

A DST is a trust that:

Owns one or more properties
Has multiple beneficial owners (investors)
Each investor owns a fractional interest
Each interest qualifies as "real property" for 1031 purposes
Investors are passive — no management responsibilities

DSTs are structured to comply with IRS Revenue Ruling 2004-86, which specifies the requirements.

Why DSTs exist

DSTs solve several problems:

Find replacement property in 45 days easier
No management responsibilities
Diversification across larger or multiple properties
Access to institutional quality assets
Smaller minimum investments
Retirement from active management

How DSTs work

DST sponsor acquires property and forms DST
Investors purchase interests through 1031 exchange
DST holds title to property
Sponsor manages the property professionally
Investors receive distributions
At sale, proceeds distributed
Investors can 1031 again into another DST or other property

DST sponsors

DST sponsors are real estate companies that:

Source large institutional properties
Structure the DST offering
Market to 1031 investors
Manage the property
Handle investor relations

Major sponsors include Inland, JLL Income Property Trust, Capital Square, Bluerock, and many others.

DST property types

DSTs typically hold:

Net lease properties (Walgreens, Walmart, etc.)
Multifamily apartments
Self-storage portfolios
Industrial distribution
Medical office buildings
Hotels
Student housing
Senior housing

These are usually high-quality, stabilized properties.

DST investment minimums

Typically $100K minimum
Some smaller ($25K-$50K)
Some larger ($500K+)

This makes DSTs accessible to smaller 1031 investors.

DST returns

Typical DST projections:

Cash on cash: 4-6%
Total return (including appreciation): 6-9%
Hold period: 5-10 years
Conservative but predictable

DST returns are generally lower than active investing because of fees and conservative underwriting. The trade-off is no management work.

DST fees

DST sponsors charge significant fees:

Selling commissions: 5-7%
Acquisition fees: 1-3%
Asset management fees: 0.75-1.5% annual
Property management fees: 3-5% of revenue
Disposition fees: 1-3% at sale
Total load: Often 8-15% of investment

These fees reduce returns substantially. DSTs are convenient but expensive.

DST risks

Sponsor risk: Bad sponsor = bad outcome
Property risk: Underperforming property
Liquidity: Cannot sell DST interests
Management out of investor's control
Fees drag on returns
Market risk: Same as any real estate

When DSTs make sense

Approaching 45-day deadline with no replacement found
Want passive investment after active career
Need to diversify out of single asset
Want institutional quality otherwise unavailable
Estate planning for next generation

When DSTs don't make sense

Want active control
Need higher returns
Want flexibility for future exchanges
Prefer to own management directly
Sensitive to fees

For many active investors, DSTs are a "last resort" rather than a primary strategy.

721 UPREIT contributions

A 721 contribution allows you to convert real estate into REIT shares without paying tax.

The basic concept

Section 721 of the IRC provides that contributions of property to a partnership in exchange for partnership interests are tax-free. UPREITs (Umbrella Partnership REITs) use this provision to acquire properties:

REIT operating partnership acquires property
You receive OP units (partnership interests) instead of cash
OP units are convertible to REIT shares
No tax on the contribution
Hold OP units until you want to convert or sell

How it works

UPREITs are structured as:

REIT at the top
Operating partnership (OP) below
OP holds all properties
REIT is the general partner of OP
Investors hold REIT shares; some property contributors hold OP units

When you contribute property to the OP:

You receive OP units
OP units track the value of REIT shares
You receive distributions like REIT shareholders
You can convert OP units to REIT shares (taxable event)
You can hold OP units indefinitely (tax-deferred)

Benefits

Tax-free contribution of property
Conversion to liquid REIT shares
Diversification across REIT portfolio
Professional management
Eliminates property management
Estate planning simplification
Step-up at death if held until death

Drawbacks

OP units are illiquid (can't sell directly)
Conversion to REIT shares triggers tax
REIT shares subject to market volatility
Returns dependent on REIT performance
Loss of direct real estate exposure

Combining 721 with 1031

You cannot do a direct 1031 into an UPREIT (unless special structures used). The typical sequence is:

1031 exchange into a DST (passive)
Hold DST for 2 years (avoid bad facts)
DST sponsor offers UPREIT conversion
721 contribution to UPREIT
Hold OP units indefinitely

This sequence achieves the ultimate exit: from active management to passive to public REIT shares, all without tax.

When 721 makes sense

Final exit from real estate management
Estate planning with multiple heirs
Diversification away from single asset class
Liquidity needs in the future
Conversion to more liquid investment

Drop and swap

"Drop and swap" is a strategy for partnerships where individual partners want different outcomes from a sale.

The problem

A partnership owns a property. Some partners want to:

Sell and pay tax
1031 exchange into a new property
1031 into different properties
Take cash

The partnership itself can do a 1031, but individual partners can't get different treatment.

The solution

"Drop" the property out of the partnership before sale:

Partnership distributes the property to partners as tenants-in-common (TIC)
Each partner owns a TIC interest
Each partner can independently sell or 1031
Partners with different objectives get different outcomes

Timing concerns

The IRS may challenge "drop and swap" if done too close to the sale:

Held individually for "long enough" before sale
Not predetermined at the time of drop
Bona fide ownership change

Best practice: drop the property at least 1-2 years before the sale. Closer drops face more risk.

Alternative: swap and drop

The reverse: do the 1031 first as a partnership, then drop the new property out to individual partners. Same end result, different sequence.

Legal complexity

Drop and swap requires careful structuring:

Operating agreement changes
Title transfers to TIC
Tax planning
Documentation of independent ownership
CPA and attorney involvement

This is sophisticated tax planning. Don't DIY.

Tenant-in-common (TIC) structures

TICs allow multiple investors to co-own real estate.

What is a TIC

Multiple owners of one property
Each owns an undivided interest
Each holds legal title to their interest
Each can sell independently
Like-kind property for 1031 purposes

TIC vs partnership

A TIC is not a partnership:

TIC: Direct ownership, can be sold individually
Partnership: Indirect ownership through entity

This distinction matters for 1031 because you can't 1031 a partnership interest, but you can 1031 a TIC interest.

TIC structures for 1031

TIC structures used to be common for 1031 syndications. Then DSTs largely replaced them because of complexity. TICs still exist for:

Smaller groups (2-5 owners)
Specific situations
Legacy structures

TIC requirements

To qualify for 1031 (per Rev. Proc. 2002-22):

No more than 35 co-owners
Each owner has fractional interest
Voting requirements specified
Restrictions on activities
Many other technical requirements

DSTs are usually preferred because they're more flexible.

Opportunity Zones

Qualified Opportunity Zones (QOZs) provide a different tax-advantaged structure for capital gains.

How QOZs work

Realize capital gain from any source (real estate, stocks, business sale)
Within 180 days, invest gain in a Qualified Opportunity Fund (QOF)
QOF invests in property in designated low-income census tracts
Defer original gain until 2026
After 10 years in QOF, no tax on QOF appreciation

Benefits

Defer original gain to 2026
Eliminate tax on QOF investment after 10 years
Powerful for new investments

Drawbacks

Geographic restriction to QOZ areas
Substantial improvement requirements
Complex compliance
Original gain still due in 2026
Long hold period required

Comparison with 1031

| Feature | 1031 Exchange | Opportunity Zone | |---------|---------------|------------------| | Property type | Any real estate | QOZ areas only | | Source of gain | Real estate sale | Any capital gain | | Deferral period | Indefinite | Until 2026 | | Elimination | At death (step-up) | After 10 years | | Geographic scope | Anywhere | QOZ only | | Complexity | Moderate | High | | Investor type | Active | Active or passive |

For real estate investors with real estate gains, 1031 is usually preferred. For investors with non-real-estate gains (e.g., business sale, stock gains), QOZ is the only deferral option.