The short answer
For a condemnation of business or investment real property, very likely yes. §1033(g)(1) swaps the usual "similar or related in service or use" test for the like-kind standard, and Rev. Rul. 2004-86 treats a Delaware Statutory Trust interest as an undivided interest in the underlying real estate, so it meets that standard. For a fire, storm or other casualty the ordinary similar-use test applies, and a passive trust interest replacing a property you managed yourself is a much weaker position. No IRS ruling addresses DSTs under §1033 by name, so get a written opinion from your own CPA or attorney before you wire the money.
At a glance
| Condemned business or investment real property | Like-kind standard applies under §1033(g)(1) |
|---|---|
| Replacement period, that property | 3 years after the close of the first tax year any gain is realized (§1033(g)(4)) |
| All other conversions | 2 years after the close of that first tax year (§1033(a)(2)(B)(i)) |
| Main home in a disaster area | 4 years (§1033(h)(1)(B)) |
| Clock start | Earlier of the disposition date or the date the threat of condemnation began |
| Qualified intermediary | Not required; you may hold the proceeds yourself |
| Identification | None. There is no 45-day list under §1033 |
| How you elect | Leave the gain out of income and attach a statement of the details to that year's return |
| Related-party bar | §1033(i) applies once the year's realized gain on converted property exceeds $100,000 |
One sentence in §1033(g)(1) is what makes a trust interest work after a taking
The statute says that where business or investment real property "is (as the result of its seizure, requisition, or condemnation, or threat or imminence thereof) compulsorily or involuntarily converted, property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use". Property held primarily for sale is excluded.
That drops you into the same like-kind vocabulary a 1031 uses, and Rev. Rul. 2004-86 already answers what a DST interest is in that vocabulary: each beneficial owner "is considered to own an undivided fractional interest" in the trust's real property. IRS Publication 544 repeats the §1033(g) rule in the same terms.
The gap is that the IRS has never applied Rev. Rul. 2004-86 to §1033 in published guidance. The reasoning transfers cleanly, because the ruling's conclusion is about ownership rather than about §1031, but a reasoned opinion in your file is worth the cost here (do I need a 1031 if my property was condemned).
A fire is judged by a different test, and passivity is exactly what that test penalises
Without a condemnation, §1033(a) requires replacement property "similar or related in service or use". Publication 544 sets out how that is judged for an owner-investor: the replacement "must have the same relationship of services or uses to you as the property it replaces", decided on whether the properties are of similar service to you, the nature of the business risks, and "what the properties demand of you in the way of management, service, and relations to your tenants".
Run a DST through those three factors and the problem is obvious. A trust interest demands nothing of you at all, so replacing a self-managed duplex destroyed by fire with a passive beneficial interest changes precisely the things the test measures. An owner whose converted property was already net-leased and professionally managed has a far better argument than one who collected the rent himself.
One relief valve exists. Under §1033(h)(2), where business or investment property in a federally declared disaster area is converted, "tangible property of a type held for productive use in a trade or business" is treated as similar or related in service or use, which widens the field considerably for disaster losses.
Your clock is three years, and it starts before the money arrives
The replacement period begins on the earlier of the date you disposed of the condemned property or the date the threat of condemnation began, and it ends three years after the close of the first tax year in which any part of the gain is realized.
Hypothetically, a calendar-year owner receives a condemnation award in August 2026. The first tax year in which gain is realized is 2026, that year closes on December 31, 2026, and the replacement period runs to December 31, 2029. Had the same owner received insurance money for a fire instead, the two-year rule would end it on December 31, 2028.
Property bought after the threat arose but before the taking counts, provided you still hold it when the property is taken. Extensions are available for reasonable cause, requested before the period ends or within a reasonable time after with a good reason, and Publication 544 says they are "usually limited to 1 year" and that a high market or scarce replacements are not grounds. Requests go by fax or mail to the SB/SE Field Examination Area Director, 985 Michigan Ave., Stop 16, Detroit, MI 48226.
No intermediary, no 45-day list, and no comfort in that
Section 1033 is not an exchange. You receive the award, you buy the replacement, and you elect on your return; there is no qualified intermediary, no identification notice and no 180-day outside date (what a QI does in an exchange, do I need a QI to exchange into a DST).
The cost rule is what actually governs the number. Gain is recognised only to the extent the amount realized on the conversion exceeds the cost of the replacement property, so anything you keep back is taxed, exactly as retained cash is in an exchange.
What the extra years do not buy is availability. A DST is a private placement with a fixed equity raise that closes when it is full, so you cannot hold a place in one for eighteen months, and you must qualify as accredited when you subscribe (is a DST a security and who can sell me one, how quickly a DST can close).
Making the election, and the amended return if the plan changes
The election is made by simply not including the gain in gross income for the year it is realized, with a statement attached to that return giving the details of the conversion. Buy the replacement after filing and you attach a further statement, with details of the property, to the return for the year of purchase.
Two consequences follow. Once you designate replacement property on a return you cannot substitute other property unless the designated property turns out not to qualify. And under §1033(a)(2)(C) the assessment period for the gain stays open until three years after you notify the IRS that you have replaced, or that you do not intend to.
If you never replace, or you replace for less than the amount realized, you file an amended return for the year of the gain and pay the tax and interest. The condemnation itself is reported on Form 4797 rather than on the Form 8824 a 1031 would use (how to fill out Form 8824).
Three traps specific to putting conversion money into a trust interest
None of these come up in an ordinary 1031, which is why they are easy to miss when advisers reach for the exchange playbook.
- §1033(i) denies nonrecognition where the replacement is acquired from a related person, once your aggregate realized gain on converted property for the year exceeds $100,000. Check the chain if any family entity sits near the sponsor or the seller.
- REIT shares are not real property and do not satisfy the §1033(g)(1) like-kind standard; the separate route of buying 80% control of a corporation under §1033(a)(2)(A) also forfeits the third year, because §1033(g)(2) withholds it.
- Basis carries the deferral forward: under §1033(b)(2) the replacement's basis is its cost reduced by the gain you did not recognise, so the trust interest starts with a low basis and correspondingly small depreciation (depreciation and bonus depreciation in DSTs).
- State conformity to §1033 is not universal, and a trust holding property in several states adds filings of its own (state tax and multi-state filing issues, 1031 rules by state).
Related questions
Can I keep the condemnation money in my own bank account?
Yes. Section 1033 has no constructive receipt rule and no intermediary requirement, so the proceeds can sit in your own accounts for the whole replacement period. The tax consequence turns on what you buy and when, not on who held the cash.
Is there a 45-day identification deadline?
No. Nothing in §1033 requires a list of candidate properties, which is the single biggest practical difference from a 1031 exchange (how identification works in an exchange).
Does insurance money from a fire get the three-year period?
No. The three years in §1033(g)(4) apply to seizure, requisition or condemnation of business or investment real property. A casualty gets two years and the stricter similar-use test.
Can one DST take both my 1031 money and my 1033 money?
Sponsors sell the same interests to different buyers with different tax positions, so nothing about the trust prevents it. The two deferrals are computed and reported separately, and a §1033 purchase needs no exchange documents.
What if I cannot find a suitable trust before the period ends?
You file an amended return for the year of the gain and pay the tax with interest. Because a private placement can close at any time, treat the last few months of the period as unusable rather than as a reserve.
Sources
Checked against these publications on September 19, 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.