Tax-Deferred Income with Less Hassle: A Smart Exit Strategy for Property Owners

When it's time to simplify your investment portfolio and liquidate some of your real estate holdings, what do you do? The answer is to utilize a 1031 exchange to transfer your equity into a Delaware statutory trust(DST).

This strategy will relieve you of your property management duties and increase cash flow for a stress free monthly income stream.

CASE STUDY

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Case Scenario: 1031 Exchange into a DST for Higher Returns
Investor Profile:
• Name: Susan Reynolds
• Occupation: Retired Business Owner
• Investment Objective: Passive income with stable returns
• Current Holdings:
o Duplex (Property A) – $2.85M
o Triplex (Property B) – $1.899M
o Duplex (Property C) – $1.65M
• Ownership: 100% equity, no debt
• Reason for Sale: Tired of active management, seeking a passive income solution with stable, predictable returns
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Step 1: Sale of Properties
Susan sells all 3 properties:
Property Sale Price
Duplex A $2,850,000
Triplex B $1,899,000
Duplex C $1,650,000
Total $6,399,000
Estimated Sales Costs (6%)
Brokerage, legal, and closing costs assumed at 6% of total:
• $6,399,000 × 6% = $383,940
Net Proceeds / Exchange Basis
• $6,399,000 - $383,940 = $6,015,060
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Step 2: 1031 Exchange into DST
• Susan uses a 1031 Exchange to defer capital gains taxes.
• She places the $6,015,060 into one or more institutional-grade DSTs.
• The DSTs offer a fixed annual return of 5% on the invested amount (distributed monthly).
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Step 3: DST Returns Over 7 Years
Annual Income from DST:
• 5% of $6,015,060 = $300,753 per year
Cumulative Returns Over 7 Years:
• $300,753 × 7 = $2,105,271
Total Value After 7 Years (No Return of Principal Yet):
• If Susan only collects income (does not sell DST shares), she receives:
o $2,105,271 in passive income (pre-tax)
What Happens at DST Liquidation?
• DSTs are typically held 5–10 years, after which the asset is sold.
• Assuming no gain or loss in property value, Susan's original $6,015,060 is returned.
• In real-world cases, there could be appreciation or depreciation, but we’ll assume flat for simplicity.
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Summary
Metric Value
Original Investment $6,015,060
Annual Passive Income (5%) $300,753
Total Income Over 7 Years $2,105,271
Return of Principal (at Exit) $6,015,060
Total Distribution $8,120,331
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Benefits to Investor
• Passive Income: No more property management headaches
• Tax Deferral: Avoids capital gains tax via 1031 Exchange
• Diversification: DSTs may hold diversified real estate assets (e.g., multifamily, medical, industrial)
• Estate Planning: DST interests can be passed to heirs with a stepped-up basis