1031 Exchange DST Checklist: 15 Steps Before You Invest

A structured pre-investment checklist for retiring real estate investors who want to defer capital gains, exit landlord responsibilities, and generate passive income — the right way.

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Investing in a Delaware Statutory Trust (DST) through a 1031 exchange is one of the most powerful tax-deferral strategies available to retiring real estate investors. But it’s also one of the most consequential financial decisions you’ll make — and there’s no room for shortcuts.

Use this checklist before committing a single dollar to any DST offering. Print it, work through it with your advisor, and don’t skip a step.

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Part 1: Eligibility & Setup

Before you even look at a DST offering, confirm your baseline qualifications and get your exchange infrastructure in place.

☐ Step 1: Verify Your Accredited Investor Status

DST investments are private placements available only to accredited investors under SEC Rule 501 of Regulation D. Confirm you qualify:

• Income test: $200,000+ individual annual income (or $300,000+ joint) for the past two years, with reasonable expectation of the same this year
• Net worth test: $1,000,000+ net worth, excluding your primary residence

If you don’t meet either threshold, you are not eligible for most DST offerings. This is a legal requirement, not a preference.

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☐ Step 2: Know Your 1031 Exchange Timeline Cold

The IRS imposes two hard deadlines. Missing either one means the exchange fails and you owe the full capital gains tax.

• Day 0: Close on the sale of your relinquished property
• Day 45: Deadline to formally identify replacement properties (in writing, to your QI)
• Day 180: Deadline to close on your replacement property/DST

Mark these dates the moment escrow opens. There are no extensions. No exceptions.

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☐ Step 3: Engage a Qualified Intermediary (QI) Before Closing

This step cannot wait. You must hire your QI before you close on the sale of your property — not after. The QI receives and holds your exchange proceeds. If you touch the money even for a moment, the exchange is disqualified.

Questions to ask your QI:

• Are exchange funds held in separate, segregated, FDIC-insured accounts?
• Are you bonded and insured?
• How many 1031 exchanges have you closed?

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☐ Step 4: Calculate Your Net Exchange Equity

Before identifying DST offerings, know exactly how much capital you have to work with.

Net Exchange Equity = Sale Price − Mortgage Payoff − Closing Costs − Commission

To achieve a full tax deferral, you must:

1. Invest at least as much equity as you netted from the sale
2. Replace the debt (either through DST leverage or a debt replacement strategy)

Work with your CPA to confirm the exact figures.

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☐ Step 5: Define Your Investment Objectives

Not all DSTs are built the same. Before you evaluate offerings, know what matters most to you:

• Monthly income: Prioritize net-leased or multifamily DSTs with stable distributions
• Capital appreciation: Look for value-add or development-adjacent offerings (higher risk)
• Estate planning: Consider DSTs that facilitate a step-up in basis or 721 UPREIT conversion at exit
• Simplicity: All DSTs eliminate management — choose based on financial fit, not to avoid work

Your objective drives every decision that follows.

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Part 2: Sponsor & Deal Due Diligence

Once you’ve identified DST offerings, scrutinize the sponsor and the deal itself before proceeding.

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☐ Step 6: Vet the DST Sponsor Thoroughly

The sponsor is the company that acquires, manages, and ultimately sells the property inside the DST. Their competence and integrity directly impact your returns.

Minimum due diligence:

• ✅ FINRA/SEC registration (look up on FINRA BrokerCheck and SEC EDGAR)
• ✅ Years in operation (prefer 10+ years with multiple full-cycle offerings)
• ✅ Number of prior DST offerings completed
• ✅ Full-cycle track record: Did prior investors receive projected returns?
• ✅ Any regulatory actions, complaints, or disciplinary history
• ✅ Leadership team background and stability

A sponsor with no completed (sold) offerings has no proven track record — only projections.

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☐ Step 7: Read the Private Placement Memorandum (PPM) — All of It

The PPM is the legal disclosure document for the offering. It is long, dense, and essential. Do not rely on the sponsor’s marketing summary.

Key sections to review:

• Risk Factors: Every material risk the sponsor is legally required to disclose
• Use of Proceeds: How is the invested capital being deployed?
• Compensation: How much does the sponsor earn and when?
• Management Rights: What can the sponsor do without investor consent? (The 7 deadly DST restrictions limit your control — understand them)
• Exit Strategy: How and when does the sponsor plan to sell the asset?

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☐ Step 8: Audit All Fees & Load Structures

DST fees can significantly reduce your effective return. Identify every fee in the offering:

Fee Type	What to Look For
Up-front load / offering costs	Typically 7–10% — this reduces Day 1 equity
Annual asset management fee	Usually 1–2% of asset value
Acquisition fee	One-time fee the sponsor charges to buy the asset
Disposition fee	Fee charged when the asset is sold at exit
Performance promote	Sponsor’s share of profits above a hurdle rate

Total fees above 15% warrant serious scrutiny. Always ask the broker-dealer for a full fee disclosure.

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☐ Step 9: Evaluate the Underlying Properties

The investment’s success depends entirely on the real estate inside the DST.

Checklist:

• ✅ Asset class and sector (multifamily, industrial, net lease, medical, etc.)
• ✅ Market location — primary vs. secondary vs. tertiary market
• ✅ Tenant quality and creditworthiness (for net lease: is the tenant investment grade?)
• ✅ Current occupancy rate and trend
• ✅ Lease terms: Average remaining lease duration and renewal options
• ✅ Phase I environmental report and physical inspection findings

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☐ Step 10: Review Debt Coverage & Loan Structure

Most DSTs carry mortgage debt. This creates risk — especially in a rising rate environment.

Key metrics:

• Debt Service Coverage Ratio (DSCR): Look for 1.20x or higher. Below 1.0x means the property doesn’t cover its own debt payments.
• Loan-to-Value (LTV): Higher LTV = higher risk. Prefer LTV below 65%.
• Loan maturity: When does the loan come due? Does it align with the projected hold period? A mismatch creates refinancing risk.
• Fixed vs. floating rate: Floating-rate debt is riskier in uncertain rate environments.

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Part 3: Financial & Legal Review

Before signing, complete your financial modeling and engage your professional advisors.

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☐ Step 11: Analyze Projected Cash Distributions

The sponsor will provide projected distribution yields. Treat these as estimates, not guarantees.

Stress-test the projections:

• What happens to cash flow if occupancy drops 10–15%?
• Are distributions coming from operations or return of capital? (Return of capital distributions aren’t income — they reduce your cost basis)
• How does the projection compare to the sponsor’s track record on prior offerings?

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☐ Step 12: Confirm the Projected Hold Period Fits Your Life

DSTs are illiquid. You are committing capital for a projected 5–10 year hold.

Questions to ask:

• Does this hold period align with your retirement income timeline?
• Do you have sufficient liquid reserves outside this investment?
• What happens to your beneficiaries if you pass during the hold period? (DSTs can transfer to heirs — confirm the mechanics)

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☐ Step 13: Understand Your Exit & Liquidity Options

DST interests are not publicly traded. There is no guaranteed exit before the sponsor sells the asset.

Know your options:

• Standard exit: The sponsor sells the property, typically at Year 5–10, and distributes proceeds
• 721 UPREIT conversion: Some sponsors offer a conversion to REIT operating partnership units at exit — a potential additional tax deferral
• Secondary market: Limited secondary markets exist (e.g., through select broker-dealers) but are illiquid, slow, and often at a discount
• Estate transfer: DST interests can be inherited by your heirs with a potential step-up in basis

Do not invest capital you may need before the projected exit.

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☐ Step 14: Consult Your CPA and Tax Advisor

Before you sign, your tax advisor must review:

• Depreciation pass-through: DST investors receive a pro-rata share of depreciation — confirm how this affects your tax situation
• State tax implications: Some states have their own exchange rules or tax DST income differently — verify for your state and the state where the property is located
• K-1 reporting: You will receive an annual K-1 from the DST — understand the reporting obligation
• Basis and boot: Any “boot” received (cash or debt relief not reinvested) is taxable — your CPA should model this precisely

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☐ Step 15: Consult Your Estate Planning Attorney

A DST investment can have significant estate planning implications — for better or worse, depending on your structure.

Review with your attorney:

• How will the DST interest be titled (individual, trust, LLC)?
• Does it align with your revocable living trust or other estate documents?
• How is the step-up in basis handled for your heirs?
• Does the DST structure accommodate the 721 UPREIT strategy your estate plan requires?

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All 15 Steps: Quick Reference

#	Step	Category
1	Verify Accredited Investor Status	Eligibility
2	Know Your 1031 Exchange Timeline	Setup
3	Engage a Qualified Intermediary (QI)	Setup
4	Calculate Your Net Exchange Equity	Setup
5	Define Your Investment Objectives	Planning
6	Vet the DST Sponsor	Due Diligence
7	Read the Full PPM	Due Diligence
8	Audit All Fees & Load Structures	Due Diligence
9	Evaluate the Underlying Properties	Due Diligence
10	Review Debt Coverage & LTV	Due Diligence
11	Analyze Projected Cash Distributions	Financial Review
12	Confirm the Hold Period Fits Your Life	Financial Review
13	Understand Exit & Liquidity Options	Financial Review
14	Consult Your CPA / Tax Advisor	Legal Review
15	Consult Your Estate Planning Attorney	Legal Review

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Before You Sign: The Final 3 Questions

Before committing to any DST offering, answer these three questions honestly:

1. “Do I fully understand every risk disclosed in the PPM?” — If not, ask your advisor to walk through each one.
2. “Can I afford to have this capital locked up for the full hold period?” — If not, don’t invest.
3. “Have I verified this sponsor’s full-cycle track record — not just their projections?” — If not, do the homework first.

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This checklist is for educational purposes only. It is not investment, tax, or legal advice. DST investments are private placements available only to accredited investors and carry significant risks, including illiquidity and potential loss of principal. Always work with qualified advisors before making any investment decision.

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