The short answer
Yes. When the trust sells, your share of the net proceeds can go to a qualified intermediary and into new real property, because a properly limited DST interest is treated as an undivided interest in the real estate under Rev. Rul. 2004-86. The debt you must replace is your share of the loan balance paid off at that closing, which Reg. section 1.1031(d)-2 treats as money you received. Sold early in a zero's life, that balance can be most of your position, so the next property usually needs comparable leverage, often another zero; sold after the loan is repaid, there may be no debt to replace at all.
At a glance
| Can you exchange out | Yes, when the sponsor sells, if the trust is still a grantor trust |
|---|---|
| Debt to replace | Your share of the loan balance paid off at the trust's sale |
| How it is counted | Debt relief is treated as money received unless offset |
| Offsets | New debt on the replacement, or cash you add |
| Value test | Buy at least your share of the gross sale price, not just the cash |
| Deadlines | 45 days to identify and 180 days to close, from the trust's closing |
| Alternative | Hold to death for a basis reset under section 1014 |
You can exchange out because you are treated as owning the building, not a trust certificate
Rev. Rul. 2004-86 holds that each investor is "considered to own an undivided fractional interest" in the property, so an exchange into the trust is an exchange for real estate and not for "a certificate of trust or beneficial interest." The same treatment applies on the way out: when the trust sells, you are treated as selling your share of the building.
Two conditions make that work. The sponsor must sell the property, since there is no practical way to exchange your interest on your own schedule. And the trust must still be a trust: if it has converted into a springing LLC, you hold a partnership interest and cannot exchange at your level.
Our cash out DSTs are structured to be 1031-eligible going in. Getting out is the ordinary DST sale and next 1031 process, with a debt problem attached.
Your share of the loan paid at closing counts as cash you received
The rule is the one you met when you sold your first property. Liabilities paid off at closing, or to which the property was subject, are "treated as money received by the taxpayer upon the exchange." In a zero, your share of the trust's loan balance on the sale date is that liability.
You offset it in two ways. Under Reg. section 1.1031(b)-1(c), liabilities you take on with the replacement are netted against liabilities you were relieved of, and cash you add counts too. Debt on the replacement must be in place at closing; a loan taken out later does not count.
Because zeros start at 80 to 90% leverage and pay the loan down from rent, the debt balance on any sale date depends almost entirely on how far through the loan the trust has run.
Hypothetical: the same position sold in year six and after payoff
Round numbers, hypothetical. You put $200,000 into a zero at 85% leverage, for a share of about $1,333,000 of property with $1,133,000 of debt.
Sold in year six for $1,400,000 with $750,000 of your loan share still owed: you receive $650,000 of cash and are relieved of $750,000 of debt. To defer everything, you must buy at least $1,400,000 of property, carrying at least $750,000 of debt or with added cash covering any shortfall. Putting $650,000 into an unleveraged trust would leave $750,000 of debt relief taxable as boot, up to your gain.
Sold after payoff for $1,400,000: you receive the full $1,400,000 in cash with no debt relief, and an all-cash replacement of at least $1,400,000 defers the gain. Run your own numbers with your CPA.
Another zero is the usual fix for a large debt balance
When the debt to replace is large relative to the cash, a high-leverage replacement is the efficient answer. Our cash out DST page describes the use: high-leverage DSTs can solve debt requirements with a small portion of proceeds, freeing the rest for low-leverage investments.
In the year-six case, roughly $135,000 placed in a new zero at 85% would carry about $765,000 of debt, enough to cover the $750,000. The remaining $515,000 could go to income-producing trusts. The arithmetic behind that sizing is in how a DST loan counts as replacement debt.
The trade-off is that you carry concentration, phantom income and tenant risk forward into a second zero. Stepping down instead has a known cost: the debt you do not replace is taxed.
Before the sale date: line up the exchange or decide to hold
The intermediary must be engaged before the trust's sale closes, and the 45-day and 180-day clocks under section 1031(a)(3) start on that closing date. Ask the sponsor for your projected share of the payoff early, because that number decides what you need to buy.
Holding is the other answer. Under section 1014, property acquired from a decedent generally takes a basis equal to its fair market value at death, so an investor who does not need the money may prefer another long-lived zero over a taxable exit; the hold for step-up guide compares the two.
- Request your share of the projected price and loan payoff from the sponsor.
- Engage the intermediary before the trust's closing date.
- Identify leveraged and unleveraged candidates within 45 days.
- Confirm the trust has not converted to an LLC; if it has, there is no exchange at your level.
Related questions
Can I sell my zero interest myself to start an exchange?
Rarely in practice. Secondary sales of DST interests are thin, usually at a discount, and often need sponsor approval, so most exits happen when the sponsor sells the property. See DST illiquidity and exits.
Do I have to replace debt if the loan is non-recourse?
Yes. The rule treats liabilities to which the property is subject as money received, whether or not you were personally liable.
Can I use cash from outside the exchange instead of new debt?
Yes. Cash you add offsets debt relief under the netting rule in Reg. section 1.1031(b)-1(c). Our answer on replacing the mortgage or adding cash compares the two.
What if the trust converted to an LLC before selling?
Your interest became a partnership interest, which Reg. section 1.1031(a)-3(a)(5) lists as not real property, so your share of the sale proceeds cannot be exchanged by you. Any exchange would have to be done by the entity itself.
Can my heirs exchange out of a zero after I die?
They can, and with a stepped-up basis the gain may be small. Our page on heirs exchanging out of a DST covers the mechanics.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- IRS, Rev. Rul. 2004-86
- 26 CFR section 1.1031(d)-2, treatment of assumption of liabilities (Cornell LII)
- 26 CFR section 1.1031(b)-1, receipt of other property or money (Cornell LII)
- 26 U.S.C. section 1031 (Cornell LII)
- 26 U.S.C. section 1014 (Cornell LII)
- 26 CFR section 1.1031(a)-3, definition of real property (Cornell LII)