1031 Tax Opportunities and Other Options After Selling an Appreciated Property

When real estate investors sell an appreciated property, 1031 tax opportunities are often the first strategies they consider, and for good reason. Deferring capital gains taxes and depreciation recapture keeps more equity invested and working toward future returns. But tax deferral is only one part of the decision. The more important question is what you want from your investment afterward: how much liquidity you need, whether you want to remain an active owner, how broadly you want to diversify, and how the transition fits into your estate plan.

This article compares four common pathways against those goals: a traditional 1031 exchange, a Delaware Statutory Trust (DST) as replacement property, a 721 UPREIT structure, and a partial-liquidity transaction. Some qualify as 1031 tax opportunities, while others rely on different provisions of the tax code.

Comparing 1031 Tax Opportunities and Other Pathways

The table below summarizes how 1031 tax opportunities and other strategies perform across the five dimensions: upfront liquidity, diversification, management involvement, estate planning, and continued real estate exposure.

¹ Estate planning outcomes depend on individual circumstances. Inherited property generally receives a basis adjustment to fair market value at death under Section 1014. For OP units, this adjusts the heir's basis in the units; adjusting the basis of the partnership's underlying assets may require a Section 754 election.

Traditional 1031 Exchange

A traditional 1031 exchange lets you sell investment or business real estate and reinvest the proceeds in qualifying like-kind property while deferring tax on capital gains and depreciation recapture. A qualified intermediary receives the sale proceeds and uses them to acquire the replacement property, preventing you from taking direct or constructive receipt of the funds. You have 45 calendar days from the sale of the relinquished property to identify potential replacements in writing. You must then complete the purchase within 180 calendar days, or by your federal tax return due date, including extensions, whichever comes first.

The like-kind standard for real estate is broad. You can exchange an apartment building for another rental property, commercial real estate, or land held for investment. You can also identify and acquire multiple replacement properties, provided you satisfy applicable IRS identification requirements, such as the Three-Property Rule or the 200% Rule. Full tax deferral depends on meeting all other Section 1031 requirements.

Pros: Keeps more equity invested, preserves direct ownership and control, and allows you to continue building a real estate portfolio without immediately recognizing eligible gain.

Cons: Strict 45- and 180-day deadlines can pressure property selection. Also, your equity remains tied to directly owned real estate, and you retain responsibility for financing, oversight, and major property decisions.

Ideal for: Investors who want to remain active real estate owners, maintain control over property selection and strategy, and continue growing a directly owned portfolio.

Delaware Statutory Trust (DST) as Replacement Property

A Delaware Statutory Trust (DST) allows multiple investors to own beneficial interests in one or more income-producing properties. Under IRS Revenue Ruling 2004-86*, interests in a qualifying DST may generally be treated as direct interests in real estate for 1031 exchange purposes. That means you can sell a directly owned investment property and reinvest the proceeds into a DST while deferring eligible gain.

Instead of selecting and managing the replacement property yourself, you invest in a pre-structured offering. The sponsor acquires the property, arranges financing, and oversees management and the eventual sale. Because DST interests are fractional, you can also divide exchange proceeds among multiple offerings to diversify across properties, markets, or asset types.

Pros: Preserves 1031 tax deferral, eliminates day-to-day property management, and can make diversification easier. Pre-structured offerings may also help investors meet the 45-day identification deadline.

Cons: DST interests are illiquid, and investors give up control over property management, financing, and exit timing. Performance depends heavily on the underlying property and sponsor. Some DSTs may offer a future 721 UPREIT pathway, but this may not be guaranteed and is not available with every structure.

Ideal for: Investors who want to transition from active property ownership to passive real estate exposure while preserving 1031 tax deferral.

721 UPREIT Structure

A 721 UPREIT allows you to contribute real estate to a REIT's operating partnership in exchange for operating partnership (OP) units. Under Section 721 of the Internal Revenue Code*, the contribution generally does not trigger immediate gain recognition. Instead of continuing to own a single property, you hold an interest in the operating partnership and gain exposure to its broader real estate portfolio.

There are generally two potential pathways into the structure. The first is a direct contribution. The operating partnership evaluates whether the property meets its acquisition criteria, which may include property type, location, value, condition, and debt profile. If the partnership accepts the property, the owner contributes it in exchange for OP units.

The second pathway may become available after an investor completes a 1031 exchange into a DST and holds the interest for investment. In a later, separate transaction, the REIT's operating partnership may agree to accept the DST property through a Section 721 contribution. If the transaction proceeds, participating investors may receive OP units in exchange for their interests. This future opportunity is not guaranteed.

Pros: Provides passive exposure to a broader real estate portfolio and eliminates the need for direct property management. Depending on the structure, OP units may later be redeemed for cash or REIT shares, providing a potential liquidity option. OP units can also offer estate planning advantages, although the treatment of underlying partnership assets may depend on Section 754 and Section 743(b) basis adjustments.

Cons: OP units generally cannot be used in another 1031 exchange. You give up control over individual properties, and redeeming OP units for cash or REIT shares may trigger deferred gain recognition.

Ideal for: Investors seeking a long-term transition from direct ownership to passive, diversified real estate exposure, particularly those focused on future liquidity and multi-generational wealth planning..

Partial-Liquidity Transaction

Unlike the three pathways above, a partial-liquidity transaction is less a separate destination than a way to modify a 1031 exchange. Instead of reinvesting all exchange proceeds, you take a portion as cash and reinvest the balance in qualifying replacement property. The cash or other non-like-kind property you receive, commonly called "boot," may trigger current gain recognition, while eligible gain on the exchanged portion remains deferred.

Boot is not limited to cash. Debt relief can also affect the taxable portion of an exchange if liabilities given up exceed liabilities assumed and the difference is not otherwise offset within the transaction.

The reinvested proceeds can go into directly owned property or a qualifying DST. Depending on the structure, a DST investment may later provide a pathway to a 721 UPREIT contribution.

Pros: Provides immediate liquidity while preserving tax deferral on eligible gain. You decide how much capital to keep invested and how much to take out for other priorities.

Cons: Receiving boot can create a current tax liability and leaves less equity invested in real estate. The exchange must still satisfy 1031 requirements, and the tax character of recognized gain depends on the property and applicable depreciation rules.

Ideal for: Investors who want cash from a property sale but do not want to recognize all eligible gain at once. It offers a middle ground between fully reinvesting through a 1031 exchange and completing a fully taxable sale.

How Bonaventure Approaches Ownership Transitions

Real estate ownership goals rarely stay the same. An investor who wants direct control today may prioritize passive income, diversification, or estate planning a decade from now. The right transition strategy depends not only on the property being sold, but also on what the investor wants ownership to look like next.

Bonaventure supports multiple ownership-transition pathways within a single relationship, including 1031 exchanges, Delaware Statutory Trust opportunities, 721 UPREIT exit options into its flagship private REIT, Multifamily Co-Investments, and custom 1031 transaction structuring. Rather than starting with a single product, the process starts with the investor's objectives and evaluates the structures that may best support them.

That flexibility also matters over time. As income needs, management preferences, liquidity priorities, and estate planning goals evolve, investors can evaluate new transition opportunities without treating each property sale as an isolated decision.

Speak with the tax equity team about 1031 tax opportunities or to evaluate which ownership-transition pathway best aligns with your objectives and what you want from your real estate portfolio next.

This article is for educational and informational purposes only and is not intended to be all-inclusive and may be changed at any time without notice or obligation to update. This article does not constitute tax, legal, or financial advice. Bonaventure does not provide tax, legal, or accounting services. Tax laws and regulations are subject to change, and individual circumstances vary. Investors should consult their own tax advisor, attorney, or qualified intermediary regarding their specific situation before pursuing any of the strategies discussed.

*The articles linked throughout were produced by an independent third parties and should not be considered a solicitation or recommendation. Any such recommendation or solicitation would be made under separate cover. We do not endorse or accept responsibility for the content of any third-party website.

DISCLOSURES

THE RISKS ASSOCIATED WITH INVESTING IN A REAL ESTATE PRIVATE EQUITY FUND GENERALLY INCLUDE:

Limited Regulatory Oversight - Since private equity funds are typically private investments, they do not face the same oversight and scrutiny from financial regulatory entities such as the Securities and Exchange Commission ("SEC") and are not subject to the same regulatory requirements as regulated investment companies, including requirements for such entities to provide certain periodic pricing and valuation information to investors. Private equity offering documents are not reviewed or approved by the SEC or any US state securities administrator or any other regulatory body. Also, managers may not be required by law or regulation to supply investors with their portfolio holdings, pricing, or valuation information.

Strategy Risk - Many private equity funds employ a single investment strategy. Thus, a private equity fund may be subject to strategy risk, associated with the failure or deterioration of an entire strategy.

Use of Leverage and Other Speculative Investment Practices - Since many private equity fund managers use leverage and speculative investment strategies such as options, investors should be aware of the potential risks. When used prudently and for the purpose of risk reduction, these instruments can add value to a portfolio. However, when leverage is used excessively and the market goes down, a portfolio can suffer tremendously. When options are used to speculate (i.e., buy calls, short puts), a portfolio's returns can suffer and the risk of the portfolio can increase.

Past Performance - Past performance is not necessarily indicative and is not a guarantee of a private equity fund's future results or performance. Some private equity funds may have little or no operating history or performance and may use hypothetical or pro forma performance that may not reflect actual trading done by the manager or advisor and should be reviewed carefully. Investors should not place undue reliance on hypothetical or pro forma performance.

Limited Liquidity - Investors in private equity funds have limited rights to transfer their investments. In addition, since private equity funds are not listed on any exchange, it is not expected that there will be a secondary market for them. A private equity fund's manager may deny a request to transfer if it determines that the transfer may result in adverse legal or tax consequences for the offering.

Tax Risks - Investors in certain jurisdictions and in private equity funds generally may be subject to pass -through tax treatment on their investment. This may result in an investor incurring tax liabilities during a year in which the investor does not receive a distribution of any cash from the Fund. In addition, an investor may not receive any or only limited tax information from private equity funds may not receive tax information from underlying investments in a sufficiently timely manner to enable an investor to file its return without requesting an extension of time to file.

Reliance on Fund Manager; Lack of Transparency - A private equity offering's manager or general partner has total investment authority over the private fund. There is often a lack of transparency as to a private equity offering's underlying investment. Because of this lack of transparency, an investor may be unable to monitor the specific investments made by the offering or to know whether the investments are consistent with the sponsor's historic investment philosophy or risk levels.

Due to the risks mentioned above, it is important to perform proper due diligence in evaluating and choosing private equity managers to place your money with. There have been occasions when private equity fund managers took on too much risk in their portfolio and lost a substantial amount of their investors' money.