Ron Nielsen

Can You Do a Partial 1031 Exchange Into a Delaware Statutory Trust?

Published on: June 6, 2025

Yes, you can absolutely do a partial 1031 exchange into a Delaware Statutory Trust (DST)–and for many investors, it’s a savvy move. Leveraging this strategy can balance tax deferral, cash flexibility, and passive income in ways that few other investment vehicles can.

If you’re considering selling a property and only reinvesting part of the proceeds, this blog will walk you through everything you need to know about using a DST as part of a partial 1031 exchange.

What Is a Partial 1031 Exchange?

A partial 1031 exchange occurs when you reinvest less than 100% of your property sale proceeds into like-kind replacement property. Any remaining cash or debt not reinvested is known as “boot” and becomes subject to capital gains tax and potentially depreciation recapture.

For example:

  • Boot in cash occurs if you keep part of your proceeds without reinvesting them.

  • Boot in debt arises if you don’t replace the same level of debt as your original property.

  • Non-like-kind property receipt also qualifies as boot.

While you’ll pay taxes on the boot, the portion reinvested qualifies for tax deferral under the IRS’ 1031 regulation. That means you still gain significant tax advantages while enjoying the flexibility of pocketing some proceeds for personal or business purposes.

Why Consider a Partial 1031 Exchange?

A partial exchange allows you to:

  • Access part of your sale proceeds without losing all tax deferral benefits

  • Pay off debts, fund vacations, or cover lifestyle needs

  • Strategically manage your capital for future investments

How Delaware Statutory Trusts Fit Into Partial 1031 Exchanges

A Delaware Statutory Trust (DST) is an excellent vehicle for partial 1031 exchanges. DSTs provide a way to reinvest a specific portion of your sale proceeds into institutional-grade real estate, offering tax deferral and passive income.

What Makes DSTs Ideal for Partial 1031 Exchanges?

  • Lower Minimums

Reinvest any amount–as little as $100,000–into a DST, making it perfect for partial exchanges when the remainder is kept as boot.

  • Passive Income

With no tenants to manage or toilets to fix, DST ownership is entirely passive. Sponsors handle property management, allowing investors to enjoy steady cash flow from monthly or quarterly distributions.

  • Flexible Dollar Amounts

DSTs allow tailored reinvestments, perfect if you’re dividing proceeds between reinvestment and personal use.

  • Institutional-Grade Investments

Most DSTs hold high-quality commercial properties like office buildings, multi-family housing, or retail spaces leased to creditworthy businesses. This means your money is invested in stable, income-generating assets.

Real-Life Example

Imagine selling a property for $1 million. You decide to reinvest $750,000 into a DST and keep $250,000 for personal use. Here’s what happens:

  • The $750,000 you reinvest qualifies for full tax deferral under IRC §1031.

  • The $250,000 kept as boot becomes taxable, subject to capital gains tax and depreciation recapture.

You’ve balanced tax benefits, cash availability, and passive income–a win-win.

Benefits of a Partial 1031 Exchange Into a DST

1. Flexibility for Personal Financial Goals

By keeping part of the sale proceeds, you can:

  • Pay down debt

  • Cover retirement or lifestyle expenses

  • Fund educational costs or holidays

  • Make charitable contributions

This flexibility allows you to use your funds how you see fit while still earning tax deferral benefits.

2. Lower Minimum Investment Options

Unlike direct 1031 exchanges that often require full-property reinvestments, DSTs break down barriers for smaller dollar amounts. Whether you reinvest $100,000 or $1 million, DSTs offer an entry point for investors at any level.

3. Passive Ownership

No more late-night tenant calls or property repairs. The DST sponsor handles every aspect of property management, freeing up your time to focus on what truly matters to you.

4. Estate Planning Simplicity

DSTs are highly estate-friendly:

  • They can be split easily among heirs, avoiding disputes over physical properties.

  • Some DSTs even allow 721 UPREIT conversions, enabling seamless transitions to REIT shares for estate flexibility and liquidity.

Tax Implications of a Partial 1031 Exchange

When conducting a partial 1031 exchange with a DST, only the portion not reinvested (the boot) is subject to taxes. This includes:

  • Capital Gains Tax (both federal and state)

  • Depreciation Recapture Tax

  • Net Investment Income Tax (NIIT) if applicable

The portion reinvested into the DST enjoys full tax deferral, allowing your money to grow unhampered by immediate tax liabilities. However, pay close attention to the 45-day identification window and the 180-day closing period to meet IRS deadlines.

Timing and Tax Considerations

IRS Deadlines

  • 45 Days

You must identify and notify the IRS about the DST properties you plan to purchase.

  • 180 Days

Complete your exchange within 180 days of selling your property.

Keep these dates top of mind to ensure your tax deferral benefits remain intact.

Professional Guidance is Key

DST exchanges can be complex, especially when dealing with partial reinvestments. Working with a 1031 exchange expert or financial advisor will ensure you follow IRS guidelines and maximize your benefits.

Is a Partial 1031 Exchange Into a DST Right for You?

A partial exchange into a DST offers the best of both worlds:

  • Tax Deferral

Use part of your proceeds for new investments while deferring taxes on the reinvested portion.

  • Income and Simplicity

Enjoy hands-off ownership with steady income from high-quality commercial properties.

  • Financial Freedom

Access cash to pay for life’s priorities, while still growing your wealth.

This strategy is particularly valuable for:

  • Retiring landlords looking to simplify their lives

  • Investors seeking estate planning solutions

  • Those looking to diversify their portfolios with institutional-grade real estate

Take the First Step Toward Smarter Investing

Considering a partial 1031 exchange into a DST? Don’t go it alone. At Medalist REIT, we specialize in helping real estate investors like you balance their financial goals with smart tax deferral strategies. Our team of experts will guide you through every step of the process, ensuring a seamless transition into DST ownership.

Contact us today at solution@medalistreit.com to schedule a personalized consultation.

Unlock the true potential of your investments with the flexibility and advantages of DSTs. Your portfolio’s future starts here.