A: A DST is a legal entity that allows you to own fractional interests in institutional-grade commercial real estate. The IRS recognizes DST beneficial interests as "real property," making them eligible for 1031 exchange treatment. This allows you to transition from active property management to passive ownership while maintaining your 1031 tax deferral.

A: Yes. A cash-out refinance prior to a 1031 exchange is permissible as long as it serves a legitimate business or investment purpose—not solely to avoid taxes. The timing between your refinance, use of proceeds, and eventual sale is critical to maintaining IRS compliance.

A: Acceptable uses include:

• Purchasing additional investment property

• Diversifying into stocks, bonds, REITs, or private equity

• Funding a business venture

• Making improvements to the property

• Restructuring existing debt

• Covering business or operational expenses

Using funds primarily for personal expenses, luxury items, or extracting cash without a clear business purpose is not considered legitimate.

A: The IRS focuses on the time between your refinance, when you use the proceeds, and the eventual sale.

Generally:

Under 3 months: Highly risky; likely viewed as tax avoidance

3-6 months: Somewhat risky; requires strong justification and documentation

6-12 months: Stronger position with documented business purpose

12+ months: Safest separation, very low IRS challenge risk

The more time between these events, the clearer it is that your refinance was an independent business decision.

A: If the IRS determines your refinance was primarily designed to extract equity immediately before the sale, the cash proceeds may be reclassified as "boot" (taxable cash received), creating a capital gains tax liability even if the 1031 exchange itself remains valid.

• Loan documents clearly stating business purpose

• Records showing how refinance proceeds were used

• Timeline showing separation between refinance and sale

• Documentation of business or investment activities funded by proceeds

• Communications with your tax advisor regarding the strategy

• Do not mix refinance proceeds with 1031 exchange funds, and ensure all exchange proceeds remain with your Qualified Intermediary.

Consult with your tax adviser and 1031 company to ensure proper compliance.

A: Yes, but any cash taken at closing is taxable and treated as "boot." This won't invalidate your 1031 exchange - the remaining proceeds can still be exchanged tax-deferred - but you'll owe capital gains tax on the cash amount received. This is why the refinance strategy happens before the sale: it allows you to access equity tax-free as loan proceeds rather than taking taxable boot at closing.

Generally yes, if the loan proceeds are used for business or investment purposes. Interest is not deductible if used for personal reasons. Interest deductibility is governed by IRC §163(d). If you don't have sufficient investment income to deduct the interest in the current year, it may be carried forward to future tax years. Consult your tax advisor for your specific situation.

Illiquidity: You typically cannot sell your interest until the DST sponsor sells the underlying property (usually 5-10 years)

No control: The sponsor makes all management and operational decisions

Distribution risk: Income distributions depend on property performance and are not guaranteed

Fees: DST offerings include sponsor fees and ongoing management costs

This is why DST investing is often most suitable for those seeking simplified, passive income and not needing access to this capital in the short term.

A cash-out refinance before a 1031 exchange into a DST is a legitimate strategy for sophisticated investors when structured properly. However, timing, purpose, and documentation are critical. This strategy requires careful planning and coordination between your mortgage advisor, tax professional, 1031 Qualified Intermediary, and DST sponsor.