Can You Do a Partial 1031 Exchange Into a Delaware Statutory Trust?
Yes, you can complete a partial 1031 exchange into a Delaware Statutory Trust, and for many investors it creates a smart balance between tax efficiency, personal liquidity, and passive income. A partial exchange gives you room to access some cash from the sale of a property while still taking advantage of the tax benefits that come with reinvesting through a 1031. When paired with the flexibility of DSTs, this approach becomes even more useful.
This guide explains how partial exchanges work, why DSTs fit naturally into the strategy, and what investors should consider before moving forward.
Understanding a Partial 1031 Exchange
A partial 1031 exchange happens when an investor reinvests only part of the sale proceeds from a relinquished property. Any funds not reinvested—or any reduction in the amount of debt replaced—creates what the IRS calls boot. Boot is taxable, but the portion that is reinvested continues to qualify for tax deferral under Section 1031.
Cash boot occurs when you keep some of the proceeds.
Debt boot arises when the replacement investment carries less debt than the property you sold.
Receiving non–like-kind property can also create taxable boot.
Even though some tax may be due on the boot, the remainder of the transaction still receives full tax deferral. This gives investors the freedom to keep a portion of their proceeds without giving up all the benefits of a 1031 exchange.
Why Investors Choose Partial Exchanges
A partial exchange appeals to investors who want access to cash for personal, financial, or strategic reasons while continuing to defer taxes on the majority of their gain. It allows you to retain liquidity, reduce debt, fund lifestyle needs, or prepare for future investments without losing the core advantage of a 1031.
How DSTs Support Partial 1031 Strategies
Delaware Statutory Trusts are one of the most flexible tools for partial exchanges. Because DST minimum investment levels are typically lower than the cost of buying a whole property, investors can reinvest exactly the amount they need to complete the 1031 exchange while keeping the rest.
Why DSTs Fit Naturally Into Partial Exchanges
Lower minimum entry points
DSTs generally accept smaller investment amounts, making it easy to reinvest only a portion of your proceeds.
Passive ownership
DSTs relieve you of all property management responsibilities. Sponsors handle operations, tenants, maintenance, and long-term planning.
Ability to fine-tune investment amounts
Whether reinvesting $100,000 or several million, DSTs provide flexibility that traditional real estate acquisitions often cannot.
Access to institutional-grade real estate
Most DST offerings include high-quality, income-producing assets—industrial, retail net lease, multifamily, and similar properties with established tenants.
A Simple Example
Suppose you sell an investment property for $1 million. You decide to place $750,000 into a DST and keep $250,000 for personal use.
The $750,000 qualifies for full tax deferral.
The $250,000 kept becomes boot and is taxed accordingly.
Meanwhile, the DST investment begins generating passive income.
This approach preserves most of the tax benefit while unlocking liquidity—often the ideal middle ground for retiring owners or investors repositioning their portfolios.
Benefits of Combining DSTs with Partial Exchanges
Flexibility to Meet Personal Financial Needs
Investors often use the retained proceeds to reduce debt, fund retirement expenses, cover major life events, or make additional investments outside of real estate.
Lower Barriers to Reinvestment
Because DSTs can accept smaller amounts, they allow precise reinvestment and remove the pressure of finding a whole replacement property.
Fully Passive Income
All responsibilities shift to the DST sponsor, giving investors predictable income without property-management demands.
Estate Planning Advantages
DST interests are easily divided among heirs. Some DSTs also offer optional future UPREIT conversions, giving families long-term liquidity and generational planning options.
Tax Implications to Consider
In a partial exchange, only the boot portion is taxable. This may include:
Capital gains taxes
Depreciation recapture
Potential Net Investment Income Tax
The reinvested portion retains all the benefits of Section 1031. Just remember that the exchange still requires adherence to the standard IRS timeline: identifying replacement properties within 45 days and completing the exchange within 180 days.
Timing and Professional Guidance
The deadlines for 1031 exchanges remain firm regardless of whether the exchange is full or partial. Investors should:
Identify DSTs or other replacement properties within 45 days
Complete the investment within 180 days
Document all steps clearly to maintain compliance
Because partial exchanges introduce nuances around boot and reinvestment levels, working with a qualified intermediary and an advisor familiar with DSTs is essential.
Is a Partial 1031 Exchange Into a DST Right for You?
This strategy may be ideal if you want to:
Preserve tax deferral while accessing some sale proceeds
Simplify your real estate ownership
Generate passive income without managing property
Move toward estate-friendly structures like UPREITs down the road
Retiring landlords, long-time owners looking to reduce complexity, and investors seeking flexibility commonly rely on partial exchanges into DSTs.
Moving Forward
If you are preparing for a property sale or exploring partial 1031 strategies, a DST may provide the blend of simplicity, passive income, and tax efficiency you need. Medalist REIT specializes in DST offerings built for stability, income, and optional long-term UPREIT transitions.
