Many landlords think their only 1031 options are (1) buy another rental property, or (2) sell and pay the taxes. There's a third option most people don't know about: passive 1031 alternatives that let you defer taxes without becoming a landlord again.
This guide explores your passive options, including the most common one—Delaware Statutory Trusts (DSTs)—along with their benefits and limitations.
The “Like-Kind” Misconception
IRS rules require 1031 exchanges into “like-kind” property—but this doesn't mean you have to buy another rental. Like-kind simply means real property held for investment or business use.
What Qualifies as Like-Kind?
✓ All of these qualify:
- Single-family rental → Apartment building
- Duplex → Commercial property
- Retail center → Raw land
- Any rental → DST interest
- Any rental → NNN lease property
- Any rental → TIC (tenancy-in-common)
✗ Does NOT qualify:
- Real estate → Stocks or REITs
- U.S. property → Foreign property
- Investment → Personal residence
Your Passive 1031 Options
If you want to stay in real estate but don't want to be a landlord, here are your main options:
Delaware Statutory Trust (DST)
A legal structure where multiple investors own fractional interests in professionally-managed real estate. The IRS ruled in 2004 that DST interests qualify as like-kind property.
Advantages:
- 100% passive—no management at all
- Monthly distributions
- Access to institutional-quality properties
- Diversify across multiple properties
- Existing debt helps avoid mortgage boot
Limitations:
- Illiquid—can't sell until DST exits
- Lower yields (typically 4-6%)
- No control over property decisions
- $100k+ minimum typically
- Accredited investors only
Triple Net (NNN) Lease Property
Single-tenant commercial property (like a Walgreens or Starbucks) where the tenant pays property taxes, insurance, and maintenance. You just collect rent.
Advantages:
- Predictable income—tenant handles everything
- Long leases (10-25 years)
- Credit-worthy tenants (national chains)
- You own it directly—full control
Limitations:
- High price points ($1M-5M+)
- Single tenant = single point of failure
- Lower yields than active properties
- Still need to find/close on property
Tenancy-in-Common (TIC)
Fractional ownership where you own an undivided interest in a property directly with other investors. More control than DST, but more complexity.
Advantages:
- Direct ownership interest
- More flexibility than DST
- Can refinance the property
Limitations:
- Max 35 co-owners (IRS rule)
- More complex financing
- Co-owner disputes possible
- Less common than DSTs today
Comparison: Your Options
| Option | Management | Typical Yield | Minimum | Liquidity |
|---|---|---|---|---|
| Another Rental | High (unless PM) | 6-12%+ | Varies | High |
| NNN Lease | Very Low | 4-6% | $1M+ | Medium |
| DST | None | 4-6% | $100k+ | Low |
| TIC | Low-Medium | 5-7% | $100k+ | Low |
DST Deep Dive: The Most Common Passive Option
DSTs are the most popular passive 1031 option because they're designed specifically for this purpose. Here's how they work:
Sponsor Creates the Trust
A real estate company (sponsor) acquires property, places it in a Delaware Statutory Trust, and offers fractional interests to 1031 investors.
You Exchange Into the DST
When you sell your rental, you 1031 exchange into one or more DSTs. Your QI transfers funds directly to purchase your interest.
Receive Distributions
The sponsor manages the property and distributes income to investors, typically monthly. You receive K-1 tax forms annually.
DST Sells (5-10 Years)
When the sponsor sells the property, you receive your share of proceeds. You can 1031 exchange again or take the cash (and pay taxes then).
DST Requirements
Accredited Investor Requirement: DSTs are securities and require you to be an “accredited investor”—either $200,000+ annual income ($300,000 with spouse) or $1,000,000+ net worth (excluding primary residence).
Typical DST Structure
- Minimum investment: $100,000-250,000
- Hold period: 5-10 years (until sale)
- Property types: Apartments, retail, medical, industrial
- Distribution frequency: Monthly
What You Give Up
- Control over property decisions
- Ability to refinance or improve property
- Liquidity until the DST sells
- Some upside potential (due to fees)
Is a Passive 1031 Right for You?
Good fit if you:
- Are done being a landlord
- Have significant gains to defer
- Value simplicity over control
- Are approaching or in retirement
- Meet accredited investor requirements
- Don't need liquidity from this investment
Not ideal if you:
- Want maximum control and returns
- Enjoy active investing
- May need the capital in the next few years
- Have less than $100k to invest
- Don't meet accredited investor status
- Want to build additional equity through improvements
Key Takeaways
You don't have to buy another rental: “Like-kind” includes DSTs, NNN properties, and other passive options.
DSTs are the most common passive option: They're designed specifically for 1031 investors who want to exit landlording.
Lower yields are the trade-off: DSTs typically yield 4-6% vs. 6-12%+ for active rentals. You're paying for passivity.
Accredited investor requirement: DSTs require $200k+ income or $1M+ net worth. If you don't qualify, NNN properties are an alternative.
Illiquidity is real: Once you invest in a DST, you typically can't access your capital until the DST sells (5-10 years).
Note: DSTs and other passive 1031 options are complex investments with specific risks. This guide provides general education—consult with a 1031 exchange specialist, tax professional, and securities advisor before investing.