1031 & DST tax strategies for CPAs and tax advisors.
Your clients are coming to you with 1031 questions. Here's what they need to know — and how to refer them to a specialist when the situation calls for one.
Why this matters for CPAs.
If you serve high-net-worth or accredited clients, you've probably had this conversation: a long-time client mentions an upcoming property sale and asks whether they should do "that 1031 thing." Your role is to help them defer the gain properly, identify the tax exposure, and coordinate with the right specialists.
Most CPAs aren't 1031 experts — and they don't need to be. The transaction is governed by IRS rules every CPA understands at a baseline. What matters is recognizing the opportunity early, understanding the tax mechanics, and knowing when to bring in a Qualified Intermediary and a securities specialist for replacement-property guidance.
This page is structured as a reference for tax professionals — not investor education. It covers the technical tax issues that come up in 1031 exchanges and DST replacements, the planning scenarios where DSTs become particularly attractive, and how to handle the referral when the client needs more than tax advice.
The client conversation.
The 1031 conversation usually starts with a question like "I'm selling my rental property — what are my options?" Here's the framework for that initial discussion.
Pre-sale planning questions
- What's the property's adjusted basis? Drives the magnitude of unrealized gain.
- How much depreciation has been taken? Recapture exposure at 25% federal rate.
- How is the property held? Individual, LLC, trust — affects same-taxpayer rule.
- What's the projected sale price and net proceeds? Establishes replacement requirements.
- How much debt is on the property? Replacement must equal or exceed (or add cash for the difference).
- What's the client's broader estate planning goal? Step-up at death changes the calculus.
Decision framework
Once you have the numbers, the decision tree is straightforward:
- Material gain + investment property + intent to stay in real estate? 1031 is almost always worth considering.
- Material gain + estate planning horizon? 1031 + hold to death (step-up) can eliminate the gain entirely.
- Client wants out of management? DST is the typical replacement vehicle.
- Client wants liquidity from the proceeds? Partial deferral may be appropriate; boot will be taxable.
- Client doesn't want any real estate exposure? 1031 may not be the right fit — straight sale and pay tax, or explore alternatives like Qualified Opportunity Funds.
The single most important pre-sale item: the client must engage a Qualified Intermediary BEFORE the sale closes. Once proceeds are constructively received by the client, the 1031 is dead. Many CPAs catch this just-in-time when reviewing settlement statements — earlier is better.
Key tax issues to flag.
The tax mechanics of 1031 exchanges and DST replacements involve several technical issues CPAs should understand thoroughly.
Basis carryover
The basis in the relinquished property carries forward to the replacement, adjusted for boot recognized and any new debt assumed. Track this carefully — it matters when the client eventually disposes of the replacement (or rolls into a subsequent 1031).
Depreciation recapture
All depreciation taken on the relinquished property carries forward as part of basis. When the client eventually sells without 1031-ing again, the cumulative depreciation is recaptured at 25% federal (plus state). A 1031 defers but doesn't eliminate this — it just delays the bill.
Boot recognition
Cash boot (proceeds taken in cash) and mortgage boot (less replacement debt than relinquished debt) are taxable in the year of the original sale. Calculate carefully — many client situations have small unintended boot from closing cost handling or insufficient debt replacement.
Form 8824 filing
Like-Kind Exchanges form is filed with the federal return for the year of the relinquished property sale. Document property descriptions, exchange dates, parties to the exchange, gain calculation, and basis carryforward. State-equivalent filings required in CA, OR, MA, and MT.
State-specific issues
- California. Clawback rules apply when 1031 replacement property is outside CA and later sold without subsequent 1031.
- Oregon. Similar clawback provisions for OR-sourced gain deferred into out-of-state property.
- Massachusetts. Specific filing requirements and withholding considerations.
- Montana. Withholding and reporting requirements for non-residents.
- Other states. Withholding on non-resident sellers, state-specific basis tracking.
K-1 reporting for DST investors
When a client invests in a DST, they'll receive a K-1 annually reporting their share of the trust's tax items. Track depreciation passed through, distributions received, and any sale gain when the property eventually dispositions. The basis from the original 1031 carries to the DST and continues to track through to disposition or step-up.
Tax planning scenarios where DSTs make sense.
DSTs aren't always the right answer, but they're particularly attractive in several planning scenarios.
The tax-deferred retirement transition
Client owns rental property with substantial appreciation. They're approaching retirement, want passive income, and want to defer the tax. A 1031 into one or more DSTs converts active rental income into passive distributions while deferring the gain. Combined with hold-to-death and step-up in basis, the deferred gain can ultimately be eliminated for heirs.
The depreciation recapture trap
Client has held property long enough that depreciation recapture is now the dominant tax exposure. A 1031 defers both capital gains AND recapture, while a straight sale recognizes both. The math often heavily favors the 1031 when recapture is material.
The diversification opportunity
Client has concentration risk in a single appreciated property. A 1031 into multiple DSTs (different sponsors, different markets, different asset types) creates diversification that direct property typically cannot. The client may prefer holding 4 DST positions instead of 1 concentrated rental.
The 45-day rescue
Client started a 1031 expecting to find direct property. Day 30 arrives without an identified property. DST subscription typically completes in 1–2 weeks, making it a viable replacement when direct property isn't materializing. Often clients identify a DST as a "backstop" alongside their primary direct-property candidates.
The estate-simplification case
Client has direct rental property they intend to leave to heirs. DST interest is generally simpler to administer through estate than direct property (no operational handoff, no immediate management decisions). The step-up in basis at death applies equally to direct property and DST interests.
When to refer to a specialist.
Your role as CPA covers the tax planning and reporting. The replacement property selection — particularly DST evaluation — typically requires a securities specialist. Here's when to make the referral.
- Client is considering DSTs. DSTs are Reg D private placements offered only through registered representatives. A specialist conversation is required for any DST recommendation.
- Client is inside the 45-day window without identified property. Time-pressure scenarios benefit from a specialist who knows current available offerings.
- Client needs help comparing direct vs DST replacement. A specialist can present both options with current pricing and availability.
- Client wants to diversify across multiple replacement properties. Multi-property exchanges are easier to structure through a specialist who can present a coordinated portfolio.
- You need help with sponsor due diligence. A specialist familiar with current sponsors can help you evaluate offerings on behalf of your client.
You stay in your tax-advisor lane. The specialist handles the securities side. Both of you serve the client's interest, and the client gets coordinated advice.
How the referral process works.
When you have a client who should talk to a specialist about DST replacement property, here's the typical path.
1. Have the client submit through the specialist match form
The Talk to a Specialist page on this site captures the client's basic situation and routes them to an appropriate registered representative. Most CPAs send clients to this form directly, then receive a copy of the specialist conversation summary afterward.
2. Coordinate with the specialist on tax issues
Once the client engages a specialist, you remain the tax advisor of record. The specialist will typically coordinate with you on the tax-sensitive aspects of replacement selection — debt replacement, boot avoidance, basis tracking — and confirm planning decisions with you before the client commits.
3. Stay involved through subscription
Subscription paperwork includes tax representations and accreditation confirmations. You'll typically review the subscription documents alongside the client, particularly to confirm the proper entity name on title (same-taxpayer rule) and the timing of the subscription for tax-year purposes.
4. Form 8824 filing
The exchange is reported on the client's tax return for the year of the original sale. You file Form 8824 documenting the exchange. The specialist provides copies of QI documents, identification letters, and closing statements to support the filing.
5. Ongoing coordination during the hold
DST investors receive annual K-1s. You handle the tax reporting; the specialist remains available for client questions about the underlying property and eventual disposition planning.
Resources for CPAs.
Several types of resources help CPAs stay current on 1031 and DST planning. Knowing what's available makes the client conversations smoother.
- IRS Section 1031 regulations and guidance. Treasury Regulations §1.1031 and related Revenue Rulings, including Rev. Rul. 2004-86 (DST eligibility) and Rev. Proc. 2000-37 (reverse exchanges).
- Form 8824 instructions. Updated annually. Reference for filing requirements and gain calculation.
- State-specific 1031 guidance. Each state's tax authority publishes guidance on conformity, clawback rules, and withholding.
- Educational content on this site. The 1031 Exchange Guide, DSTs Explained, and Glossary are structured to be peer-level resources for tax professionals.
- Sponsor PPMs. When evaluating specific DST replacements, the PPM includes tax sections that detail K-1 reporting, basis tracking, and projected tax treatment for the offering.
- FactRight and Cherry Bekaert reports. Independent due diligence reports on DST offerings often include tax-focused sections relevant to CPA review.
Have a client who needs DST guidance?
If you're a CPA with a client approaching a 1031 exchange — or a client who already missed a deadline and needs to understand the tax exposure — we can connect you with a specialist who works regularly with tax advisors. No commitment; just a knowledgeable conversation.
Connect with a Specialist →Frequently asked questions.
Do I need to know specific DST offerings to advise clients?
No. Your role is the tax planning side — identifying the opportunity, understanding the tax exposure, and coordinating with a registered representative who handles the offering-specific work. You don't need to be an expert in current DST offerings to add value to the client's 1031 decision.
Can a CPA receive referral compensation for sending clients to a DST specialist?
Generally no — securities referral compensation for non-registered persons is restricted under FINRA rules. Some structures may allow nominal referral arrangements, but they're heavily restricted. Most CPAs refer clients to specialists for the relationship value, not for direct compensation. Consult with your state board and the broker-dealer involved before any referral compensation arrangement.
How do I handle a client whose 1031 just failed?
The gain is recognized in the year of the original sale. File Form 8824 reflecting the failed or partial exchange. Calculate capital gains and depreciation recapture exposure precisely. The client may have partial-deferral options if they closed on some replacement property; coordinate with the QI to confirm. See the Failed 1031 Recovery page for detail on options after a failed exchange.
What's the tax treatment of distributions from a DST during the hold?
DST distributions are reported on the K-1 and typically include a mix of taxable income (rental income net of expenses), return of capital (untaxed up to remaining basis), and depreciation pass-through. The tax character depends on the property's operations during the year. K-1s are usually issued in early Q1 for the prior tax year.
What's the basis treatment when a 1031 lands in a DST?
The basis from the relinquished property carries to the DST beneficial interest, adjusted for boot recognized and any new debt assumed through the DST's leverage. The client's investment in the DST equals their pro-rata share of the property plus their share of trust-level debt. Track basis carefully — depreciation passes through annually and reduces basis.
What happens at the end of a DST's hold period from a tax perspective?
When the sponsor sells the underlying property, the trust distributes proceeds pro-rata to beneficial owners. Each investor recognizes gain (or loss) on disposition — calculated as proceeds received less remaining basis. The client can 1031 again into a new replacement property (often another DST) if they prefer to continue deferring, recognize the gain, or use the proceeds for non-real-estate purposes.
Can I share educational content from this site with clients?
Yes. The 1031 Exchange Guide, DSTs Explained, Glossary, and Sponsor Evaluation Framework pages are structured to be sharable with clients as pre-call homework. The content is sponsor-agnostic, plain-English, and doesn't promote specific offerings — so it's safe to send from a tax-advisor perspective without compromising your independence.
How does step-up in basis interact with 1031 deferrals?
Step-up applies at the death of the property owner regardless of how many 1031 exchanges preceded it. If a client 1031s multiple times through their life and dies still owning the final replacement property, the heirs receive a stepped-up basis equal to the property's fair market value at death — eliminating all the deferred gain accumulated over the chain of exchanges. This is one of the most powerful applications of 1031 planning combined with estate planning.