If you have invested in real estate in the past, you likely have also done a 1031 exchange. As you undoubtedly learned, however, 1031s have numerous risks and disadvantages. While they defer your capital gains tax liability when you sell a piece of appreciated real estate, the rules and regulations that apply to them can make them unappealing at best and downright dangerous at worst. Why? Because they often fail, leaving you with an enormous capital gains tax to pay.
The DST can be used as a vehicle that does what a 1031 exchange does, without the problematic timelines and other stringent requirements, but it also can do so much more. In order to understand the pros and cons of a DST and a 1031 exchange and the benefit they give you, you must first understand 1031 exchanges themselves.
An IRS 1031 exchange is a fantastic tool for an investor to transfer a real estate asset into another without recognizing a taxable capital gain. However, there are limitations of its use and strict rules governing its use: like-kind limitations, time windows and asset type restrictions. If you wish to diversify your real estate asset into other investments or if your asset is not real property to begin with, then you need a 1031 exchange alternative like a Deferred Sales Trust.