DSTs, 1031s and Tax Law Change Risk: How Much Should You Worry?

Forty years of §1031 changes: three enacted narrowings, two unenacted caps, and one 2025 law that left it alone

The enacted record is modest. Pub. L. 98-369 added the 45-day identification and 180-day receipt limits for transfers after July 18, 1984; Pub. L. 101-239 added the related-party rules in §1031(f) and the rule that foreign real property is not like kind for transfers after July 10, 1989; and the Tax Cuts and Jobs Act, Pub. L. 115-97 §13303, limited the section to real property for exchanges completed after December 31, 2017.

The proposals that would have hurt DST investors never passed. The Obama administration's FY2017 budget proposed limiting deferral to $1,000,000 per taxpayer per year for exchanges completed after December 31, 2016; the Biden administration's FY2025 budget proposed $500,000 ($1,000,000 on a joint return) for exchanges completed in taxable years beginning after December 31, 2024, scored at $19.7 billion over ten years.

On July 4, 2025 the One Big Beautiful Bill Act was signed with §1031 untouched, and the IRS estate-tax table now shows a $15,000,000 basic exclusion for deaths in 2026. The next serious run at §1031 will need a new budget cycle and a majority that has not existed so far.

Every cap proposal and the 2017 change applied to future exchanges, so a completed DST purchase is the safest position

Read the effective-date language: the 2017 act applied 'to exchanges completed after December 31, 2017' and protected any exchange where the relinquished property was disposed of or the replacement property received by that date. Both cap proposals likewise reached only exchanges completed after their effective dates, with excess gain 'recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.'

Nothing in that pattern unwinds deferral already achieved. The exposure sits at the next leg: if a $500,000 cap were law when your DST sells, an investor carrying $1,500,000 of deferred gain would recognize $1,000,000 in that year even if every dollar went into a new exchange, and only $500,000 would roll forward.

That is why an investor with a large gain and a sale already under contract has more reason to complete the exchange than to wait, and why the timing of future DST exits, not the entry, is where a cap would bite.

Rev. Rul. 2004-86 is published guidance the IRS could modify, but §7805(b)(8) and the IRS's own procedures make retroactive harm unlikely

The DST's fit inside §1031 rests on a 2004 revenue ruling, not on the statute, and the regulation defining real property expressly excludes 'certificates of trust or beneficial interests' unless, as the ruling reasons, the grantor-trust rules make you the owner of the underlying property. A future IRS could narrow that ruling (like-kind qualification).

Two safeguards limit what that would do to existing holders. Under 26 CFR 601.601(d)(2)(v)(e) taxpayers 'generally may rely upon Revenue Rulings published in the Bulletin,' and under (d)(2)(v)(c), when a ruling is revoked or modified, §7805(b) 'ordinarily is invoked to provide that the new rulings will not be applied retroactively to the extent that the new rulings have adverse tax consequences to taxpayers.' Section 7805(b)(8) gives the Secretary that power over rulings.

The nearer legislative idea was different: the FY2025 budget proposed treating sales between a grantor trust and its deemed owner as taxable, effective for transactions on or after enactment, aimed at estate-planning trusts. It did not pass and it targeted sales to trusts rather than the ownership rule DSTs rely on, but it shows Congress is willing to legislate inside the grantor-trust rules that make a DST work.

The step-up at death is the bigger structural exposure for swap-till-you-drop plans than a §1031 cap

Most DST estate plans depend on §1014 wiping out decades of deferred gain at death. The FY2025 budget proposed treating death as a realization event with a $5,000,000 per-person exclusion, portable to a surviving spouse for $10,000,000 per couple and indexed after 2024, effective for decedents dying after December 31, 2024. It also was not enacted.

Had it passed, a DST holder with $3,000,000 of deferred gain and no other appreciated assets would have owed nothing at death, while one with $8,000,000 of gain would have owed tax on $3,000,000 regardless of any 1031 history. The plan that survives both proposals is the same: hold gains that fit inside plausible exclusions, keep records that can compute them, and avoid a portfolio whose entire logic is that the rules never change.

A CPA or estate attorney should model your family's exposure under current law and under the last proposal, because the difference tells you how much of your plan is tax law and how much is real estate.

Speed up or slow down? Only a sale already in motion should be accelerated, and only if the DST stands on its own numbers

The effective-date pattern argues for completing an exchange you have already decided to do rather than waiting to see a bill; it does not argue for buying a trust you have not vetted to beat a proposal that has failed in every budget since the FY2017 cycle. A rushed DST purchase costs a real up-front load and years of illiquidity for a rule change that may never come.

Hypothetical comparison: an investor with $600,000 of gain facing roughly $150,000 of federal tax might defer all of it by exchanging into a sound trust; the same investor pushed into a weak trust with a 10% load on $1,000,000 of equity has spent $100,000 to defer $150,000 and owns the wrong property. The property, sponsor and leverage decide the trade (key risks); the politics only sets the urgency.

Four ways to build a plan that survives a cap, a ruling change or a step-up repeal

None of these costs anything if the law never changes, and each one limits the damage if it does.

• Stagger exits: the proposed caps were per taxpayer per year, so several trusts with different projected sale dates spread recognized gain across years instead of stacking it into one.
• Keep a basis file that can compute gain at any moment: every Form 8824, closing statement and grantor-trust statement, plus California's FTB 3840 if you exchanged California property (California rules).
• Hold liquidity outside the trusts equal to the tax a cap would trigger at the next sale, so a rule change forces a payment, not a distressed decision.
• Treat a sponsor's 721 option as a separate lever: contribution to a REIT partnership is governed by §721, not §1031, but it ends future exchanges (after a 721).