Watching your investment or commercial property values increase can be satisfying. But when it’s time to sell, capital gains taxes could present a hard pill to swallow.

You’ve probably heard of a so-called 1031 like-kind exchange, which could prove useful if you wish to maintain a similar property. Section 1031 of the Internal Revenue Code allows an investor to defer payment of capital gains taxes that could arise from the sale of a business or investment property. Taxes may be deferred by using the proceeds of the sale of the property to purchase like-kind real estate as long as the investor satisfies certain conditions. A typical 1031 exchange transaction looks like this:

An investor sells the property, known as the relinquished property, and the proceeds are escrowed with a qualified intermediary (QI).

Through a written agreement with the investor, the QI transfers funds for the purchase of a replacement property.

The investor receives the new property.

This process must also follow a specific timeline, taking no more than 180 days.

But what if you no longer want to manage your property or tenants? What if you don’t want to take on additional mortgage debt? What if you encounter problems closing on a selected replacement property — the seller could change his or her mind, the inspection could uncover issues with the property or financing can’t be secured within the 180-day time frame? If the exchange fails, it can leave the investor on the hook for paying capital gains taxes on their relinquished property.

You may want to consider a Delaware statutory trust (DST) — a 1031 exchange tool.

DSTs are similar in the way a typical 1031 exchange is structured, but the investor receives beneficial interest in a DST versus a new property. Investments may be in various property types — including industrial, health care, hospitality, multifamily, office, retail, self-storage and student housing.

DSTs allow multiple investors to own fractional interests in a single property or a portfolio of properties. Beneficial interests in DSTs are considered like-kind property for purposes of 1031 exchanges. DST exchanges can offer a variety of advantages, including no management responsibilities (in the hands of an experienced sponsor-affiliated trustee), access to institutional-quality property, lower minimum investments and diversification. Moreover, you can continue to exchange real properties within the DST structure until the investor’s death.

Estate planning is another way DSTs can be used by providing equal ownership and flexibility among heirs. For instance, heirs can opt to continue receiving distributions from the investment and may receive the step up in cost basis to help mitigate capital gain liabilities. Heirs may also choose what to do with their inherited portion upon the sale of the property the DST owns.

If time is of the essence, a DST could also be a good backup plan as the time to close could be substantially less than the 180 days of a typical 1031 transaction. Most have minimum investments as low as $100,000, so smaller investors could be eligible.

Of course, there are rules. Not all property will qualify for 1031 exchange. As with any investment, there’s risk. Real estate is still subject to economic and market volatility, including that related to supply and demand, inflation and  a tenant’s inability to pay rent. You don’t hold title to the property. Instead, you own beneficial interests in the trust and have limited control over the investment. It’s an illiquid investment, and there’s currently no active secondary market for selling your interest. Potentially higher fees also could present a deterrent.

There are also other real estate investment vehicles to consider for tax deferral and investment and estate planning, such as an UPREIT (721 Exchange) and qualified opportunity fund (QOF).

Depending on your unique cash flow requirements, risk profile, tax issues and wealth planning objectives, there’s a lot to consider. You should discuss the options and risks with your tax, legal and wealth advisors before taking any action.