The Landlord’s Exit: 1031 Exchanges & Delaware Statutory Trusts (DST)
The Landlord’s Exit: 1031 Exchanges & Delaware Statutory Trusts (DST)
Tired of the “Three Ts” (Tenants, Toilets, and Trash)? How to sell your rental property without paying capital gains tax, and swap into institutional-grade “Mailbox Money.”
Executive Summary
- The Problem: You own a $5M apartment building. You are tired of managing it. If you sell, you face Federal Capital Gains (20%), State Tax (up to 13%), NIIT (3.8%), and **Depreciation Recapture (25%)**. You might lose 40% of your equity to taxes.
- The Classic Solution (1031 Exchange): Section 1031 allows you to defer all taxes if you reinvest the proceeds into a “Like-Kind” property within 180 days. But buying another building just trades one headache for another.
- The Passive Solution (DST): A **Delaware Statutory Trust (DST)** allows you to exchange your active building into a fractional ownership of a massive institutional asset (e.g., an Amazon distribution center or a 500-unit Class A luxury complex). You get the tax deferral of a 1031, but **zero management responsibilities**.
The “Swap ’til You Drop” Strategy
The Endgame: Deferral is not just delaying; it’s eliminating.
👉 Process: 1. Exchange Active Building into DST ➔ 2. Collect passive income for life ➔ 3. Die holding the DST.
👉 Result: Upon death, your heirs receive a **Step-Up in Basis** to the current market value. The millions of dollars in deferred taxes and depreciation recapture are **wiped out forever**.
Mechanic: From Active to Passive
Simulation: Selling a $2M Rental Property (Cost Basis: $200k)
| Feature | Active Ownership | Delaware Statutory Trust (DST) |
|---|---|---|
| Management | Hands-On (or Property Mgr) | 100% Passive (Institutional) |
| Asset Quality | Local / Residential | Institutional / Class A / Commercial |
| Liquidity | Sell anytime | Locked (until property is sold) |
“Real estate should be a path to freedom, not a second job in retirement. A 1031 Exchange into a DST allows you to graduate from being a ‘Landlord’ to being a ‘Real Estate Investor’—keeping the income but ditching the toilets.