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A certain kind of conversation comes up constantly with real estate investors, and it usually starts the same way: “I want to sell this rental property, but I don’t want to pay the taxes on it.”
Often, the person saying it has owned an investment property for years, sometimes decades, and they’re simply done. Done fielding calls about a leaking roof. Done finding new tenants. Done being on call for whatever goes wrong at two in the morning. The active management side of owning real estate wears people down eventually, no matter how good the property has been financially.
That same success is exactly what’s keeping them stuck. Years of appreciation, plus years of depreciation taken along the way, add up to a tax bill that feels big enough to make selling outright unappealing. So, they hold on, still managing the tenants and the toilets and the trash, because the alternative looks worse.
What a 1031 Exchange Does
Most people in this position may have heard of a 1031 exchange. It’s the like-kind exchange that lets you sell an investment property and defer the federal capital gains tax, along with any depreciation recapture, as long as you roll the proceeds into another investment property.
What trips people up is the next assumption they make without realizing it: that rolling into “another property” means signing up for the same headaches all over again. So the thinking often stops there, and the exchange gets written off as not worth the trouble. Why go through the process of a 1031 just to end up back where you started, managing another building?
Where the DST Comes In
That assumption is where a lot of people miss something important. A 1031 exchange doesn’t have to move you into another actively managed property. It can move you into a Delaware Statutory Trust, or DST, which is a structure that owns an institutional-grade piece of real estate on behalf of a group of investors. When you exchange into a DST, you become a fractional owner of that property rather than the operator of it.
Practically, that means the cash flow keeps showing up, often referred to as mailbox money, without any of the responsibilities that used to come attached to it. No leases to manage. No repairs to coordinate. You’re still invested in real estate, and you still get the income from it, but the operational side of ownership belongs to someone else now.
The Part We Emphasize for Clients Here
There’s a second piece to this that even fewer people think about, and it might be the more valuable one long term. Hold that DST structure long enough, and it can carry a step-up in basis when you pass away. That means the capital gain you deferred through the original 1031 exchange, potentially built up over many years, never actually comes due at the federal level. Your heirs inherit the property at its value on the day they receive it, not at the original purchase price decades earlier.
So what starts as a way to stop being a landlord can end up functioning as a potently useful estate planning tool. It’s not just about getting out of active ownership. Done well, it can benefit generations to come.
If you’re sitting on real estate, you’re tired of actively managing, let’s schedule a year-end strategy conversation about what a 1031-to-DST exchange could look like for you.
This material is for informational purposes only and does not constitute tax, legal, or investment advice. 1031 exchanges and investments in Delaware Statutory Trusts (DSTs) involve complex IRS rules, carry risk, and may not be suitable for all investors, including risks related to illiquidity and loss of principal. Please consult your tax advisor and attorney before pursuing a 1031 or DST strategy.