After a Failed Exchange, a DST Is Off the Table: Bonus Depreciation Fund or Opportunity Zone Fund?

Why a DST stops working the day the exchange fails

A DST defers gain only because section 1031 treats it as like-kind real property received in an exchange. Once the 45-day list is empty or day 180 passes, there is no exchange left to complete, and money released by the intermediary is taxable sale proceeds. Buying a trust interest with it is an ordinary investment; our page on DSTs without a 1031 covers that use.

The timing of the tax depends on when you are paid. Under Reg. section 1.1031(k)-1(j)(2), a seller who began with a bona fide intent to exchange can report the failed exchange on the installment method, so gain is recognized in the year the intermediary releases the money. A sale in the autumn of one year that fails in the next can move the gain into the later year. Our guide to failed exchange options covers the tax bill itself.

That recognition date matters, because it starts the only clock left: the opportunity zone window.

An opportunity zone fund defers the gain you reinvest, if you beat the 180-day clock

Section 1400Z-2(a)(1) excludes from current income gain invested in a qualified opportunity fund during the 180-day period beginning on the date of the sale. The regulations at 26 CFR 1.1400Z2(a)-1 start that period on the day the gain would be recognized, and for installment-method gain let you start it on the date a payment is received or on the last day of the tax year.

Only the gain has to go in, not the whole sale price, which our opportunity zone page also notes. A fund must hold at least 90% of its assets in qualified opportunity zone property.

The calendar now decides the value. Under the law as it stands for 2026 investments, deferred gain is included in income on December 31, 2026, so an investment made this year buys almost no deferral. Public Law 119-21 amended the section for amounts invested after December 31, 2026: deferral runs until the earlier of a sale or five years after the investment, the basis rises by 10% of the deferred gain at five years, or 30% in a qualified rural fund, and appreciation can be excluded after ten years. If your 180-day window reaches into 2027, investing in January rather than December is the difference.

A bonus depreciation fund offsets the gain instead of deferring it, and only passive gain

Our accelerated depreciation funds use cost segregation studies when property is placed in service to separate components that can be deducted at once, producing large paper losses in year one. Section 168(k) allows 100% first-year depreciation on qualified property with recovery periods of 20 years or less, and Public Law 119-21 applied that to property acquired after January 19, 2025.

The loss reaches you as a passive loss. Under section 469, passive losses offset passive income, and gain on the sale of a rental is generally passive, so a loss in the same tax year can sit against it. The loss has to arrive in the year the gain is recognized; a fund that places property in service next year does not help this year's gain.

Nothing is excluded. The deductions reduce your basis in the fund, and the depreciation is taxed back when the fund sells, possibly at higher ordinary rates. Our guide to bonus depreciation versus a 1031 shows how that reversal works.

A worked comparison on a hypothetical $400,000 passive gain

Hypothetical, round numbers. An exchange fails and the intermediary releases the money in February 2027, so $400,000 of gain is recognized in 2027 under the installment rule.

Opportunity zone route: invest $400,000 in a fund within 180 days of the payment. The gain is deferred until the earlier of a sale or five years after the investment; at five years, $40,000 of it is never taxed because of the 10% basis increase; after ten years, any appreciation in the fund can be excluded. The cost is locking up $400,000 in one fund for years.

Bonus fund route: invest in a fund that places property in service in 2027 and produces a first-year passive loss. Whatever loss it delivers offsets the $400,000 of passive gain in 2027, subject to at-risk and basis limits. The ratio of loss to investment varies with each fund's cost segregation and leverage, and the offering documents state it. Run your own numbers with your CPA.

• 180-day window open and you can hold for five to ten years: opportunity zone fund.
• Window closed, gain passive, year-end still ahead: bonus depreciation fund.
• Both available: some investors place the gain in a fund and use a bonus fund against other passive income; see 1031 vs opportunity zone vs paying tax.

Eligibility and next steps: check accreditation, character of the gain and the dates

Both kinds of fund are commonly sold as private placements under Regulation D, where most purchasers must be accredited under 17 CFR 230.501(a): net worth over $1,000,000 excluding your home, or income over $200,000, or $300,000 jointly, in each of the last two years.

Confirm with your CPA what part of the gain is capital gain eligible for deferral, what is passive for the bonus fund, and which tax year the gain falls in. Our plan B guide covers sequencing traps when you layer the two.