DST Case Study: How a Solo Investor Deferred $310,000 in Taxes After Selling a Net-Lease Commercial Building

This case study is illustrative and based on composite real-world scenarios common to DST 1031 exchanges. Names and identifying details are fictional. Figures are representative of typical transactions and provided for educational purposes only.

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Frank Deluca spent 22 years as the landlord of a single-tenant commercial building in suburban Denver. The building — a 6,200 square-foot structure leased to a regional physical therapy chain — was in many ways a perfect investment: triple-net lease, the tenant paid all operating expenses, and the rent arrived like clockwork every month.

But by 2025, Frank was 68 and seriously thinking about retirement. The building had appreciated significantly, his tenant’s lease was coming up for renewal, and the thought of navigating a potential re-leasing situation — finding a new tenant, negotiating terms, potentially funding tenant improvements — was exhausting to contemplate.

More importantly, his CPA had recently walked him through what the sale would actually cost him. The numbers were eye-opening.

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The Tax Picture Before the Exchange

Frank had purchased the building in 2003 for $820,000. Over 22 years of ownership, the property had appreciated substantially. A commercial broker estimated its current market value at $2,050,000.

But Frank’s adjusted cost basis wasn’t $820,000 — it was significantly lower. He’d been depreciating the building on his tax returns each year (commercial property depreciates over 39 years). Twenty-two years of depreciation had reduced his basis considerably.

Depreciation calculation (simplified): Building value (excluding land, estimated 80% of purchase): $656,000 Annual depreciation (commercial, 39 years): $656,000 ÷ 39 = $16,821/year 22 years of depreciation: $16,821 × 22 = $370,051

Original purchase price: $820,000 Less accumulated depreciation: $370,051 Plus improvements over the years: $45,000 Adjusted basis: $494,949

Estimated taxable gain: Sale price: $2,050,000 Less adjusted basis: $494,949 Less closing costs (estimated 3%): $61,500 Taxable gain: approximately $1,493,551

Federal tax breakdown:

• Long-term capital gains (20%) on $1,123,500 of appreciation: $224,700
• Depreciation recapture (25% on $370,051): $92,513
• Net Investment Income Tax (3.8% on entire gain): $56,755
• Federal total: $374,968

Colorado state tax (4.4% flat rate):

• $1,493,551 × 4.4% = $65,716

Total estimated tax: approximately $440,684

Frank would walk away from a $2 million building with roughly $1.6 million after tax — before paying off any remaining mortgage balance.

“I knew there would be taxes,” Frank told his advisor. “I didn’t know it would be that much.”

His CPA confirmed that without a 1031 exchange, this was the realistic number. With a properly executed DST 1031 exchange, all of it could be deferred.

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The Pre-Sale Planning Process

Frank began working with a DST-specialized financial advisor four months before listing his building. This lead time proved essential.

Step 1: Reviewing DST options in advance

Frank’s advisor presented several DSTs for pre-screening:

• A medical office portfolio (hospital-system tenants, NNN leases)
• An industrial/logistics distribution center DST
• A net-lease quick-service restaurant portfolio
• A Class B multifamily apartment DST in the Southeast

Frank had a preference for commercial and industrial property — it matched his investment comfort zone. He wasn’t interested in residential. He also preferred longer lease terms to support predictable income. The medical office and industrial DSTs resonated.

Step 2: Documenting his exchange eligibility

His CPA confirmed his eligibility and calculated the exchange amount he’d need to reinvest to defer all gain. Because his building had a small remaining mortgage of $95,000, the math worked as follows:

• Net sale proceeds (after closing costs and mortgage payoff): $2,050,000 − $61,500 − $95,000 = $1,893,500
• To defer all gain: reinvest at least $1,893,500 into replacement property
• Debt replacement requirement: the $95,000 mortgage payoff must be replaced with either new debt or additional equity in the replacement property

Most DST investments have their own debt structure, which satisfies the debt replacement requirement proportionally. Frank’s advisor confirmed that his combined DST investments would carry proportional debt exceeding $95,000, satisfying this requirement.

Step 3: Engaging a Qualified Intermediary

Frank engaged a QI two weeks before his building closing. The QI was a member of the Federation of Exchange Accommodators with segregated, bonded accounts.

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The Exchange

Frank’s commercial building closed in August 2025. His QI received $1,893,500 in net proceeds and held them in escrow. The 45-day identification clock started.

Within 38 days — well within the deadline — Frank formally identified two DSTs:

DST Investment #1: Medical Office Portfolio

• Underlying property: A portfolio of 4 medical office buildings in Nashville, TN and Charlotte, NC, leased to hospital system tenants on 10–15 year NNN leases
• Sponsor track record: 17 years in business, 12 completed exits, average investor return on exited deals approximately 8.2% annually including appreciation
• Frank’s investment: $950,000
• Projected annual distribution: 5.4% cash-on-cash
• LTV: 42% (conservative leverage)
• Projected hold: 8–12 years

DST Investment #2: Industrial/Logistics Center

• Underlying property: A 480,000 sq ft distribution facility in Columbus, OH, leased to a national e-commerce fulfillment company on a 12-year NNN lease
• Sponsor track record: 11 years in business, 6 completed exits
• Frank’s investment: $943,500
• Projected annual distribution: 5.1% cash-on-cash
• LTV: 48%
• Projected hold: 7–10 years

Total invested: $1,893,500 — matching net proceeds exactly

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The Tax Outcome

Federal taxes owed on the sale: $0 Colorado state taxes owed: $0 Tax on $440,684 deferred: Every dollar

“I kept telling myself it wasn’t real until my accountant confirmed it,” Frank said. “I sold a $2 million building in August and had zero tax due in April.”

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Monthly Passive Income: The New Reality

Within 45 days of completing the exchange, both DSTs began monthly distributions:

Investment	Amount	Annual Rate	Monthly Distribution
Medical Office Portfolio	$950,000	5.4%	$4,275
Industrial Distribution	$943,500	5.1%	$4,010
Total	$1,893,500	~5.25% blended	$8,285/month

For comparison, Frank’s net operating income from his commercial building — after accounting for property taxes, insurance, maintenance reserves, and the occasional capital expenditure — had been approximately $68,000 per year, or $5,667/month. His new DST distributions were $8,285/month — $2,618 more per month in passive income, with zero management responsibility.

“The tenant called twice in the last year of my ownership with lease renewal negotiations,” Frank noted. “I spent four months dealing with that. Now I check my bank account and the money is there.”

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Year-One Tax Efficiency: Depreciation at Work

In the first full year of DST ownership, Frank’s combined K-1s showed:

• Gross distributions received: $99,420
• Depreciation and pass-through deductions (including a cost segregation study the medical office sponsor had commissioned): $61,200
• Net taxable income: $38,220

Frank effectively received $99,420 in cash but was taxed on only $38,220 — a tax efficiency ratio of 38.4%. His actual federal income tax on $99,420 in distributions worked out to approximately $9,173 (in the 24% bracket on the taxable portion).

After-tax monthly income: approximately $7,520/month.

Compare this to investing $1.9 million in a 5.25% taxable bond: $99,750 in annual income, fully taxable at ordinary income rates, resulting in approximately $76,110 after federal and state taxes — $6,342/month. The DST’s depreciation shield provided meaningfully better after-tax income on similar gross yields.

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The Estate Planning Integration

Frank is divorced with two adult children. He worked with an estate attorney to:

1. Hold both DST interests in his revocable living trust, so they would pass to his children without probate at his death
2. Update his beneficiary designations and coordinate with his IRA accounts
3. Discuss the stepped-up basis opportunity — if Frank holds the DST interests until death, his children would receive them at fair market value with no capital gains tax on the $1.5 million in deferred gains

“My advisor explained that if I just hold these and die with them, my kids get the full value tax-free,” Frank said. “That changed how I think about this entirely. It’s not just about my retirement — it’s about what I’m building for them.”

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Challenges Encountered

K-1 timing: Frank’s first K-1 for the medical office DST arrived in March — later than his brokerage 1099s. This delayed his ability to complete his tax return until mid-March. His CPA advised him to build in lead time in future years.

Non-resident state filing: Because the medical office properties were located in Tennessee and North Carolina, Frank’s CPA recommended reviewing whether those states required non-resident filings for his share of income. After reviewing the income threshold rules for both states, his CPA determined the amounts were below the non-resident filing thresholds — no additional state returns were needed. But the review was necessary.

The “waiting” phase: Between his building sale closing in August and the first distributions arriving in September/October, Frank had a brief period of no real estate income. His reserves were adequate to cover this, but he noted it was worth planning for.

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Key Takeaways From Frank’s Experience

1. Lead time is everything. Frank’s four months of pre-planning allowed him to pre-screen DST options, understand the exchange mechanics, and have replacement investments nearly selected before his building closed. He wasn’t rushing through DST due diligence in a 45-day window.

2. Matching property type preference to DST type matters. Frank’s comfort with commercial and net-lease property meant he was selecting DST categories he already understood conceptually. This reduced the learning curve and made his due diligence more effective.

3. Depreciation is a real financial benefit, not just a tax technicality. Frank’s after-tax income exceeded what he would have received from a comparably yielding taxable investment by a meaningful margin. Understanding the depreciation shield changed how he thought about comparing DST yields to bond yields.

4. The estate planning dimension was underappreciated until his advisor explained it. The stepped-up basis strategy wasn’t part of Frank’s original thinking — it emerged from his estate planning conversation after the exchange. Many investors don’t know to ask about it.

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Final Reflection

Frank Deluca sits in a meaningfully better financial position than if he’d sold his commercial building in a taxable transaction:

• He retained $440,000 in capital that would have gone to taxes
• His monthly income is $2,600 higher than it was from direct ownership
• His after-tax yield exceeds comparable taxable alternatives
• His children may inherit over $1.9 million with no capital gains liability

The DST 1031 exchange wasn’t a perfect solution — the illiquidity is real, and Frank won’t be able to access this capital readily if circumstances change. But for his situation — significant equity, a desire to exit active management, adequate other liquid reserves, and estate planning goals that align with long-term holding — the strategy was nearly purpose-built for his circumstances.

“I wish I’d known about this 10 years ago,” he said. “I would have planned everything differently.”