What is a 1031 exchange?

A 1031 exchange is a tax-deferral strategy that lets you sell investment property and reinvest the proceeds into another “like-kind” property without immediately paying capital gains taxes. Instead of handing over 25–40% of your profit to the IRS, you can keep that money working for you in new real estate.

Why do landowners and farmers use a 1031 exchange?

Landowners often use a 1031 exchange to move from management-heavy properties—like farms, ranches, or commercial buildings—into more passive, professionally managed real estate. Many choose Delaware Statutory Trusts (DSTs) because they offer diversification, steady income, and no landlord responsibilities.

What are the IRS rules for a 1031 exchange?

The IRS has three “equal or greater” requirements:

1. Equal or greater purchase price – If you sold a property for $5M, you must reinvest all $5M.

2. Equal or greater equity – If you had $3M in equity after paying off debt, all $3M must go into the new property.

3. Equal or greater debt – If you had $2M in debt on the old property, you must replace at least $2M of debt on the new property (or add that amount in cash).

Miss any of these, and you trigger taxable “boot.”

What is “boot” in a 1031 exchange?

Boot is any cash or debt relief you receive that doesn’t get rolled into the replacement property. For example, if you don’t replace enough debt, the IRS treats the shortfall as income, and you’ll owe taxes on it.

How can I replace debt in a 1031 exchange?

There are several strategies:

• Take on new debt – Borrow the same amount of debt you had on your old property.

• Add fresh cash – Instead of borrowing, contribute your own cash to cover the debt requirement.

• Overfund with equity – If you put in enough extra cash, you don’t need to carry debt.

• Accept partial boot – You can intentionally reduce your leverage, but you’ll owe tax on the amount of debt not replaced.

How do DSTs make debt replacement easier?

Here’s where Delaware Statutory Trusts stand out. With a DST, the debt replacement is already baked in.

When you invest in a DST, you’re buying a fractional interest in institutional real estate—multifamily, self-storage, medical, student housing, etc.—that already has financing in place. That financing is non-recourse debt.

This means:

• You don’t have to arrange your own loan. The DST structure satisfies the IRS’s debt replacement rules automatically.

• Your debt requirement is covered proportionally. If you invest $500,000 into a DST that’s structured 50% equity and 50% debt, your investment represents $1,000,000 of property value.

• No personal guarantees. Because the DST debt is non-recourse, the lender can only look to the property itself—not your ranch, not your savings, not your personal balance sheet.

For many investors, this is the cleanest way to handle debt replacement. You meet the IRS’s requirement without taking on new bank debt in your own name.

Debt Replacement: Old Way vs. DST Way

Traditional 1031 with Local Bank1031 Using a DSTYou invest $500,000 equity and borrow $500,000 from your local bank.You invest $500,000 equity, and the DST automatically pairs it with $500,000 non-recourse debt already in place.You’re on the hook for a $500,000 recourse loan—the bank can come after you personally if something goes wrong.Your share of the debt is non-recourse—the lender’s only collateral is the property, not your ranch, not your savings.You manage the financing: underwriting, guarantees, refinancing risk, balloon payments.The financing is pre-packaged and managed by the DST sponsor—no personal guarantee, no loan documents, no refinance headaches.Loan shows up on your balance sheet and can impact borrowing power. Debt is off your books—you meet the IRS replacement rules without personal liability.

Bottom line:

• Old way: You carry the debt yourself.

• DST way: The debt is baked in, non-recourse, and the liability doesn’t follow you home.

What are the benefits of using DSTs for debt replacement?

For landowners and ranchers who’ve spent decades carrying loans, DSTs can feel like a fresh start. Some key benefits:

• Debt “off your books.” The non-recourse DST debt doesn’t show up on your personal balance sheet or require ongoing loan servicing.

• No refinancing risk. You’re not on the hook for rate resets, balloon payments, or lender negotiations.

• Simplified compliance. The DST sponsor structures the financing in advance, so your exchange automatically satisfies IRS rules.

• Peace of mind. You meet the debt requirement without saddling your heirs—or yourself—with another personal liability.

Can I just add cash instead of taking on debt?

Yes. If you’d rather stay debt-free, you can add enough cash to cover the debt requirement. For example, if you had $2M in debt on your old property, you could simply contribute $2M cash in your new deal. This avoids leverage but requires liquidity.

What happens if I don’t replace the debt?

If you don’t replace the debt, the IRS taxes the difference as “boot.” For example, if you had $2M in debt and only replaced $1M, the $1M shortfall becomes taxable. That could mean a six-figure surprise tax bill.

What’s the bottom line on 1031 exchange debt rules?

A 1031 exchange is one of the best tools for protecting wealth, but the debt replacement rules are non-negotiable. Whether you take on new debt, contribute cash, or leverage non-recourse DST financing, you must satisfy the IRS’s “equal or greater” requirements across purchase price, equity, and debt.

Handled correctly, a 1031 exchange keeps your equity working for you. Mishandled, it hands the IRS a piece of your legacy..

Disclaimer: DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and attorney. There are risks associated with investing in real estate and DST properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. These investments are not suitable for all investors. Tax laws are subject to change which may have a negative impact on a DST investment. This material is not to be interpreted as tax or legal advice. Investors are advised to speak with their own tax and legal advisors for advice or guidance regarding their particular situation. Diversification does not ensure a profit or guarantee against loss. Potential cash flows/returns/appreciations are not guaranteed and could be lower than anticipated. The information herein has been prepared for educational purposes only and does not constitute an offer to sell securitized real estate investments.