The Landlord’s Exit: 1031 Exchanges & Delaware Statutory Trusts (DST)
The Landlord’s Exit: 1031 Exchanges & Delaware Statutory Trusts (DST)
You are tired of “Tenants, Toilets, and Trash,” but selling your apartment complex triggers a massive tax bill. How to swap your active headache for a passive institutional asset tax-free.
Executive Summary
- The Landlord’s Trap: You bought a building for $1M in 1990. It is now worth $5M. You want to retire.
👉 The Hit: If you sell, you pay Capital Gains Tax + Depreciation Recapture (25%) + NIIT + State Tax. You might lose **$1.5M (30%)** of your nest egg to the IRS. - The Solution (1031 Exchange): Section 1031 allows you to swap one investment property for another tax-free. But you don’t want another building to manage.
- The Vehicle (DST): You swap your building into a **Delaware Statutory Trust (DST)**.
👉 What is it? A DST is a fractional share of a massive institutional asset (e.g., a $100M Amazon Warehouse or a Mayo Clinic building).
👉 The Benefit: You own a piece of the real estate (qualifying for 1031), but you have **Zero Management Responsibilities**. Checks just show up in your mailbox.
The “Swap ‘Til You Drop” Endgame
The Ultimate Legacy: Why pay taxes ever?
👉 The Strategy: You keep doing 1031 Exchanges into new DSTs for the rest of your life. You live off the cash flow.
👉 The Finale: When you die, your heirs receive the DST shares with a **Step-Up in Basis**. The $4M of deferred gain is wiped out. They can sell the next day tax-free.
Mechanic: From Active to Passive
Simulation: $5M Apartment Sale
| Feature | Active Management | DST (Passive) |
|---|---|---|
| Responsibility | Everything (Leaks, Evictions) | None (Professional Sponsor) |
| Debt | Personal Guarantee (Recourse) | Non-Recourse (No Risk to You) |
| Diversification | Single Asset (Concentrated) | Easy to Split (Buy 5 different DSTs) |
“A DST is not about maximizing returns; it is about maximizing freedom. You might make slightly less than running the building yourself, but you are buying back your time. And unlike selling for cash, you are doing it with pre-tax dollars.”