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Webinar Summary

Advanced Tax-Deferred Real Estate Strategies

Speakers: Weiming Peng, Principal, Excel 1031; Frank Piscitelli, Registered Representative, Sequent Real Estate and Wealth Management

Original Air Date: August 6, 2026

Run Time: Approximately 79 minutes

Topic Area: Real Estate Planning • 1031 Exchanges • Delaware Statutory Trusts • Capital-Gains Tax Planning • Estate Planning

Key Takeaways

• A properly structured Internal Revenue Code §1031 exchange may defer gain when business or investment real property is exchanged for other qualifying real property, but it does not permanently eliminate the gain. 
• The 45-day identification deadline and 180-day completion deadline are strict. A qualified intermediary should generally be engaged before the relinquished property closes so the seller does not receive or control the proceeds. 
• “Like-kind” is broad for domestic real estate. A rental house may generally be exchanged for land, an apartment building, commercial property, or a qualifying Delaware Statutory Trust interest. 
• Section 121’s principal-residence exclusion may sometimes be combined with a §1031 exchange, but allocation, depreciation, nonqualified-use rules, ownership structure, and the property’s actual use require careful tax analysis. 
• DSTs may offer passive ownership, diversification, and access to prearranged financing, but they are private securities with limited liquidity, sponsor risk, fees, and accredited-investor requirements. 
• The best time to begin planning is before the property is listed or placed under contract—not after closing. The session emphasized advance coordination among the client, qualified intermediary, CPA, attorney, real estate professional, lender, and financial advisor. 

Understanding the Purpose of a 1031 Exchange

Section 1031 generally permits a taxpayer to postpone recognizing gain when real property held for productive use in a trade or business or for investment is exchanged for other like-kind real property that will also be held for business or investment purposes.

The provision currently applies only to real property. It no longer applies broadly to exchanges of equipment, vehicles, artwork, or other personal property.

During the session, Weiming Peng explained that the strategy allows investors to retain capital that otherwise might be paid in current taxes and deploy it into a replacement property. Common reasons for exchanging include:

• Diversifying among locations or property types 
• Consolidating several properties into one larger investment 
• Moving from appreciation-oriented property to stronger cash flow 
• Reducing active management responsibilities 
• Acquiring property with additional depreciable basis 
• Continuing a long-term real estate and estate-planning strategy 

The IRS describes §1031 gain as postponed, not forgiven. If the replacement property is later sold without another qualifying exchange, some or all of the deferred gain may become taxable. 

Details to Know

Potential taxable components of a direct sale may include:

• Federal long-term capital gain 
• Unrecaptured §1250 gain attributable to depreciation 
• The 3.8% net investment income tax, when applicable 
• State income tax 

The webinar used a rough 30% combined tax estimate for some California owners. That was presented only as a planning illustration. The actual liability depends on basis, improvements, depreciation, selling expenses, income, filing status, state residency, passive-loss rules, and other facts. 

Like-Kind Real Property Is Broad—but Limited to the United States

For real estate, “like-kind” refers to the property’s nature or character rather than its grade or quality.

A taxpayer may generally exchange:

• A rental house for an apartment building 
• Commercial property for vacant land 
• Farmland for an industrial building 
• One property for several replacement properties 
• Several properties for one replacement property 
• Qualifying real estate for an eligible DST interest 

U.S. real property is not like-kind to real property located outside the United States.

The replacement property must be held for investment or productive use in a trade or business. A property acquired principally for immediate resale or personal use may not qualify. 

Advisor Takeaway

Document investment intent. Lease activity, property-management agreements, insurance, tax reporting, financing, marketing materials, and personal use can all affect whether the property was genuinely held for a qualifying purpose.

The Four Exchange Structures Discussed

Simultaneous Exchange

The relinquished and replacement properties transfer at approximately the same time.

Although conceptually simple, simultaneous closings can be difficult to coordinate because both transactions must remain aligned.

Delayed Exchange

This is the most common structure.

After transferring the relinquished property, the taxpayer generally must:

• Identify potential replacement property in writing within 45 calendar days. 
• Receive the replacement property by the earlier of 180 calendar days after the transfer or the due date of the federal return, including extensions. 

The replacement property must be properly identified to a permitted party. The deadlines generally are not extended merely because financing, inspections, negotiations, or another transaction takes longer than expected. 

Reverse Exchange

A reverse exchange may be considered when the desired replacement property must be acquired before the existing property can be sold.

Because the taxpayer cannot simply own both properties and later declare that a reverse exchange occurred, an exchange accommodation titleholder and specialized documentation are generally required. Reverse exchanges also create financing, title, timing, and transaction-cost challenges.

Improvement or Construction Exchange

An improvement exchange may allow exchange funds to be used to improve qualifying replacement property during the exchange period.

The webinar illustrated a client selling property for $1 million and locating a replacement for $850,000. Rather than recognizing gain associated with the unused value, the client might complete qualifying improvements while the property is held within the appropriate exchange structure.

A combined reverse-improvement exchange may be possible when the client acquires and improves the replacement property before selling the relinquished property.

Advisor Caution

Only improvements completed and included in the replacement property’s value before the exchange deadline generally help satisfy the replacement requirement. Improvement exchanges require specialized legal, tax, financing, construction, and intermediary coordination.

The Qualified Intermediary Must Be Involved Before Closing

A delayed exchange generally requires a qualified intermediary to enter into the exchange agreement, receive the proceeds, and transfer them toward the replacement property.

The seller cannot take actual or constructive receipt of the sale proceeds and later decide to complete a 1031 exchange. The IRS specifically notes that receiving or controlling the money can cause immediate gain recognition. 

The transcript described the qualified intermediary’s role as preparing the exchange documents and holding the proceeds until they are applied to the replacement property. 

Due-Diligence Questions for a QI

Advisors and clients should ask about:

• Segregation of client funds 
• Bonding and errors-and-omissions coverage 
• Cybersecurity and wire procedures 
• Internal controls 
• Financial strength 
• Experience with reverse and improvement exchanges 
• State licensing or regulatory requirements 
• Procedures for verifying wiring instructions 
• How interest on exchange funds is handled 

Because federal law does not create a comprehensive national licensing regime for qualified intermediaries, selection and controls matter.

Reinvestment Requirements and Taxable “Boot”

To maximize deferral, the investor generally seeks to:

1. Acquire replacement property with a value equal to or greater than the value of the relinquished property, after appropriate exchange expenses; and 
2. Reinvest all net exchange proceeds. 

Cash or other non-like-kind property retained by the taxpayer may result in recognized gain, often called boot.

Debt also matters, but the webinar clarified an important misconception: the taxpayer does not necessarily need to obtain a new loan identical to the old mortgage. The investor may replace value using:

• New financing 
• Additional cash 
• Debt embedded in a leveraged DST 
• A combination of these sources 

The analysis is based on the exchange’s overall values, liabilities, cash retained, and tax basis—not simply whether the new mortgage equals the old one. 

Advisor Takeaway

Do not rely on rules of thumb alone. Have the CPA model:

• Realized gain 
• Recognized gain 
• Exchange expenses 
• Liabilities relieved and assumed 
• Cash retained 
• Depreciation history 
• Basis in the replacement property 

Replacement-Property Identification Rules

The webinar reviewed three methods for identifying replacement property.

Three-Property Rule

The taxpayer may identify up to three potential replacement properties, regardless of value.

200% Rule

The taxpayer may identify more than three properties if their combined fair market value does not exceed 200% of the relinquished property’s value.

This rule may be useful when the client plans to acquire several properties or diversify among several DST offerings.

95% Rule

If the other limits are exceeded, the taxpayer may identify additional property but must ultimately acquire at least 95% of the total value identified.

Because failure can disqualify the entire exchange, this rule is rarely used outside carefully structured portfolio transactions. The transcript emphasized that DSTs must be identified by the deadline if they are intended to serve as replacement or backup property. 

Important Planning Point

A DST cannot normally be added on day 46 merely because the client’s preferred direct real estate transaction failed. When appropriate, potential DSTs should be evaluated and included within the identification plan before the deadline.

Converting a Residence to Rental Property

The session explored whether a former principal residence can become qualifying §1031 property.

There is no single form that transforms a home into investment property. The taxpayer’s intent and actions matter. Relevant evidence may include:

• Moving to another primary residence 
• Renting the former home at market terms 
• Executing a bona fide lease 
• Reporting rental income and expenses 
• Updating insurance 
• Addressing mortgage and local-use requirements 
• Limiting personal use 
• Maintaining records supporting the conversion 

The tax code does not impose one universal minimum rental period for every property. However, IRS Revenue Procedure 2008-16 provides a safe harbor for dwelling units. For relinquished property, it generally requires ownership for at least 24 months before the exchange and qualifying fair-market rental use during each of the two preceding 12-month periods, with restricted personal use. A transaction outside the safe harbor is not automatically invalid, but it receives less certainty and becomes more dependent on facts and circumstances. 

Advisor Takeaway

The webinar mentioned one- or two-year holding practices used by some CPAs. The clearest published dwelling-unit safe harbor is the two-year framework in Revenue Procedure 2008-16. Clients contemplating conversion should obtain individualized tax advice before listing the property.

Combining the Section 121 Home-Sale Exclusion With Section 1031

A property may sometimes qualify partly for the principal-residence exclusion under §121 and partly for §1031 deferral.

Section 121 may exclude up to:

• $250,000 of qualifying gain for an eligible single taxpayer 
• $500,000 for certain married couples filing jointly 

The taxpayer generally must have owned and used the property as a principal residence for at least two years during the five-year period ending on the sale date.

IRS guidance confirms that §§121 and 1031 may both apply to the same transaction when a home has also been used for business or rental purposes. 

The webinar illustrated:

• A residence partly occupied and partly rented 
• A duplex where one unit is occupied and the other rented 
• A former residence converted entirely to rental use 
• A property that included a home office 

Important Technical Clarifications

Rental after moving out: A former residence may still satisfy the two-out-of-five-year test if sold within the applicable period. However, depreciation allowed or allowable after May 6, 1997 generally cannot be excluded.

Rental before moving in: When rental or investment use precedes principal-residence use, the nonqualified-use rules may require part of the gain to remain taxable even after the taxpayer lives there for two years. The transcript correctly noted this concern when discussing an owner moving into one unit of a long-held apartment building. 

Mixed-use property: Allocation may be required when the business or rental portion is physically separate from the dwelling unit, such as a separate apartment or detached structure.

Home office: Business use inside the same dwelling can be treated differently from a separately identifiable rental or business unit. It is not safe to assume that claiming a 10% home-office deduction automatically makes 10% of the property eligible for a §1031 exchange. Depreciation remains relevant, and the exact allocation should be determined by the client’s CPA under IRS guidance.

Advisor Takeaway

The combined §121/§1031 strategy is highly fact-specific. Obtain a written projection before changing use, signing a lease, moving, listing the property, or changing title.

Ownership Structures and the Same-Taxpayer Requirement

The webinar emphasized that the taxpayer disposing of the relinquished property generally should be the same taxpayer acquiring the replacement property.

This becomes complicated when property is owned through:

• A multi-member LLC 
• A partnership 
• A disregarded single-member LLC 
• A revocable trust 
• An irrevocable trust 
• Co-ownership among unrelated people 

A single-member disregarded LLC or revocable grantor trust may often be treated as the same taxpayer as its owner for federal tax purposes. A partnership or multi-member LLC, by contrast, generally owns the real estate as a separate taxpayer; the individual partners own partnership interests, which are not qualifying real property for §1031 purposes.

The session described the difficulties that arise when family members or partners jointly own property through an entity but want to separate and complete individual exchanges. 

Advisor Caution

“Drop-and-swap” and “swap-and-drop” transactions—distributing interests before or after an exchange—raise holding-purpose, timing, partnership, state-tax, lender, and audit issues. They should not be implemented at the last minute.

Delaware Statutory Trusts as Replacement Property

Frank Piscitelli described DSTs as fractional interests in institutional-quality real estate structured to qualify as replacement property under IRS Revenue Ruling 2004-86.

An investor may receive a beneficial interest in properties such as:

• Apartments  
• Industrial facilities 
• Medical offices 
• Self-storage  
• Retail  
• Senior housing 
• Other commercial real estate 

The IRS ruling recognizes that an interest in a properly structured DST meeting the ruling’s requirements may be treated as an interest in real property for §1031 purposes. 

Potential Benefits

• Passive ownership without direct landlord duties 
• Diversification across sponsors, regions, and property types 
• Ability to invest precise portions of exchange proceeds 
• Potentially rapid closing 
• Access to prearranged property-level debt 
• A possible backup when direct real estate cannot be completed 

Important Risks

• Limited liquidity and no guaranteed secondary market 
• Sponsor and property-management risk 
• Tenant and occupancy risk 
• Interest-rate and refinancing risk 
• Fees and offering expenses 
• Lack of direct control 
• Restrictions on the DST trustee’s ability to renegotiate leases or materially modify the property 
• No guarantee of income, appreciation, timing, or return of principal 

DST offerings are typically private securities. Investors generally must qualify as accredited investors under Regulation D. The SEC notes that qualifying trusts or other entities may meet a $5 million asset or investment threshold, while other pathways may also apply. The webinar’s reference to a $5 million rule for an irrevocable trust should therefore be treated as one possible accredited-investor route, not a universal rule for every trust. 

Advisor Takeaway

Review the private-placement memorandum, debt, fees, sponsor history, tenant concentration, projected hold period, distribution assumptions, conflicts, and exit strategy. A DST’s eligibility for §1031 treatment does not establish investment suitability.

Estate Planning and the “Swap Until Death” Strategy

The webinar discussed the long-standing concept of continuing exchanges throughout life and leaving appreciated real estate to heirs.

Under current law, inherited property generally receives a basis adjustment under §1014, often to fair market value at death. This may substantially reduce or eliminate built-in gain for income-tax purposes.

However, this is not the same as saying all taxes disappear automatically. Advisors must consider:

• Federal and state estate taxes 
• Community-property rules 
• Ownership at death 
• Debt 
• Depreciation and suspended losses 
• Trust provisions 
• Whether the basis-adjustment rules change 
• The estate’s liquidity and beneficiary objectives 

A client should not retain unsuitable, illiquid, or poorly performing real estate solely for a potential basis adjustment.

Failed Exchanges and Year-End Tax Timing

The session noted that if an exchange starts late in one tax year but fails in the following year, certain qualified-intermediary arrangements may permit installment-method reporting because the taxpayer could not receive the funds until the following year.

This result is not automatic. It depends on the exchange agreement, restrictions on access to the proceeds, timing, constructive-receipt rules, and the client’s facts.

A failed exchange should never be intentionally relied upon as a tax strategy without CPA review.

Advisor Opportunity

When an exchange fails in the following year, the additional timing may create an opportunity to evaluate:

• Capital-loss harvesting 
• Charitable gifts 
• Estimated payments 
• Retirement-plan contributions 
• Income timing 
• State residency and filing consequences 

Reporting and State Considerations

A completed exchange is generally reported on IRS Form 8824, even when no current gain is recognized. The form reports the properties, dates, values, recognized gain, deferred gain, and basis of the replacement property. 

State reporting may continue after an out-of-state exchange. The webinar highlighted California Form 3840, which tracks California-source deferred gain when California property is exchanged for replacement property outside the state.

Clients should obtain advice in every relevant jurisdiction, particularly when:

• Selling in one state and buying in another 
• Moving residency 
• Using entities formed in another state 
• Investing through a DST 
• Holding property in trust 

Client Conversation: Practical Application

• Begin the exchange discussion before listing the property. 
• Ask the CPA to calculate basis, depreciation, suspended losses, and expected taxes from a direct sale. 
• Engage and vet the qualified intermediary before closing. 
• Confirm the taxpayer and title structure on both sides of the exchange. 
• Create an acquisition plan before the 45-day clock begins. 
• Consider identifying suitable backup property or DSTs before the deadline. 
• Compare a full exchange with a partial exchange and intentional recognition of some gain. 
• Review liquidity needs before using an illiquid DST. 
• Obtain a detailed §121/§1031 analysis before converting a residence or mixed-use property. 
• Coordinate the exchange with retirement income, estate planning, charitable goals, debt management, and portfolio concentration. 
• File Form 8824 and all required state forms. 
• Preserve settlement statements, exchange agreements, identification notices, appraisals, leases, depreciation schedules, and basis records. 

Sources & References

Internal Revenue Service — Like-Kind Exchanges: Real Estate Tax Tips
https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

Internal Revenue Service — Form 8824, Like-Kind Exchanges
https://www.irs.gov/forms-pubs/about-form-8824

Internal Revenue Service — Instructions for Form 8824
https://www.irs.gov/instructions/i8824

Internal Revenue Service — Publication 523, Selling Your Home
https://www.irs.gov/publications/p523

Internal Revenue Service — Publication 527, Residential Rental Property
https://www.irs.gov/publications/p527

Internal Revenue Service — Revenue Procedure 2005-14, Coordinating Sections 121 and 1031
https://www.irs.gov/pub/irs-drop/rp-05-14.pdf

Internal Revenue Service — Revenue Procedure 2008-16, Rental Dwelling Safe Harbor
https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

Internal Revenue Service — Revenue Ruling 2004-86, Delaware Statutory Trusts
https://www.irs.gov/pub/irs-drop/rr-04-86.pdf

Securities and Exchange Commission — Accredited Investors
https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investors

California Franchise Tax Board — Form 3840, California Like-Kind Exchanges
https://www.ftb.ca.gov/forms/misc/3840.html

Compliance Note: This summary is provided for educational purposes only and does not constitute individualized tax, legal, securities, real estate, appraisal, lending, or investment advice. Section 1031 transactions and DST investments involve strict deadlines, complex tax rules, transaction costs, illiquidity, and potential loss. Clients should coordinate with qualified tax, legal, investment, real estate, and intermediary professionals before proceeding.