You’ve owned the property for years. Maybe decades. It’s done well for you. But at some point the midnight maintenance calls, the tenant turnover, and the constant upkeep start to outweigh the returns. You’re ready to step back.
The problem is, selling triggers taxes. Capital gains, depreciation recapture at 25%, the 3.8% Net Investment Income Tax, plus state taxes. On a long-held property with significant appreciation, that total can be substantial. Enough that many investors feel stuck, continuing to manage a property they’ve outgrown because the tax hit feels too steep.
There is a way to transition out without triggering that bill.
How a 1031 Exchange Works
IRS Section 1031 lets you sell an investment property and defer all capital gains and depreciation recapture taxes by reinvesting into like-kind replacement property. The basics:
- All proceeds (equity and debt) must be reinvested
- Replacement property must be equal or greater in value
- A Qualified Intermediary holds the funds throughout
- 45 days to identify your replacement property
- 180 days to close
Most investors know this much. What many don’t realize is that “replacement property” doesn’t have to mean another building you manage yourself.
You Don’t Have to Buy Another Property to Manage
This is where a lot of investors get stuck. They assume a 1031 means trading one set of responsibilities for another.
A Delaware Statutory Trust (DST) qualifies as like-kind replacement property under IRS Revenue Ruling 2004-86. It allows you to exchange into fractional ownership of institutional-quality real estate without any management responsibilities. A professional sponsor handles everything. You collect passive income.
Common DST property types include:
- Multifamily communities
- Distribution centers and industrial
- Medical offices
- Self-storage facilities
- Senior and student housing
For someone who is done managing, this changes the equation. You keep your wealth in real estate, defer the taxes, and get your time back.
What the Income Looks Like
- Most DSTs distribute income monthly, beginning the month after you close
- Typical yields range from 4.25-6% annually, depending on the property
- Returns vary and are not guaranteed
- Depreciation passes through and can offset income on your tax return
- You receive a 1099 or similar statement annually, reported on Schedule E
Some investors find they earn more from a DST than they were making managing the property themselves.
Don’t Overlook the Debt Piece
The IRS considers the full value of your exchange, not just the cash. If your relinquished property had a mortgage, the replacement must carry equal or greater debt or you face a taxable event on the shortfall.
DSTs address this naturally:
- They come with prepackaged non-recourse debt
- You don’t personally qualify for the loan
- Loan-to-value ratios typically range from 25-70%
- You can spread across multiple DSTs to match the exact debt you need
Estate Planning Benefits
A 1031 exchange into a DST also preserves the step-up in cost basis for heirs. If you hold through your estate, your beneficiaries may receive the property at current market value, potentially eliminating capital gains and depreciation recapture taxes entirely. For families with significant real estate wealth, this is often just as important as the income.
Is This the Right Fit?
DSTs aren’t for everyone. Before you move forward, understand:
- They are illiquid, with hold periods typically running 5-10 years
- You give up control of property decisions to the sponsor
- Only available to accredited investors
- Each project carries its own risk profile and should be evaluated carefully
For the investor who has been managing rental property for years and is ready to step back, a DST solves a specific set of problems at once: tax deferral, passive income, no management, and estate planning preservation.
We start every conversation by understanding what you’re trying to accomplish. Rod works directly with your CPA, attorney, and real estate professional to make sure the full picture is coordinated.
If you’re thinking about selling and wondering what comes next, that’s a good time to talk.
DST investments are available only to accredited investors and involve risk, including the potential loss of principal. This post is for informational purposes only and does not constitute tax or legal advice. Consult your tax and legal advisors regarding your specific situation. This is not an offer to sell securities.
