Real DST Case Study: How a Retiring Landlord Deferred $180K in Taxes

Tom is 67 years old. He bought a four-unit rental property in Phoenix, Arizona in 2003 for $380,000. He managed it himself for 22 years — screened tenants, handled repairs, chased late rent. The property was good to him. But by early 2025, the property was worth $1.2 million, and Tom was done being a landlord.

His accountant gave him the hard news first.

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The Tax Problem: What Tom Was Facing

“I thought I’d just sell and be done with it,” Tom said. His accountant walked him through the math.

Over 22 years of ownership, Tom had claimed approximately $200,000 in depreciation deductions — a legitimate tax benefit that reduced his taxable income every year. But the IRS collects that benefit back when you sell, at a 25% recapture rate.

Here’s what Tom’s tax exposure looked like:

Tax Component	Calculation	Amount
Depreciation recapture (25%)	$200,000 × 25%	$50,000
Adjusted cost basis	$380,000 − $200,000	$180,000
Total capital gain	$1,200,000 − $180,000	$1,020,000
Long-term capital gains (15%)	$820,000 × 15%	$123,000
Net Investment Income Tax (3.8%)	Applicable portion	~$7,000
Total estimated federal tax liability		~$180,000

Tom had a $150,000 mortgage remaining on the property. After paying it off at closing, his net equity would be approximately $1,050,000. A tax bill of $180,000 would consume 17% of his net proceeds before he invested a single dollar toward retirement.

He had a different idea.

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The Decision: Pursue a 1031 Exchange into a DST

Tom’s CPA referred him to a DST investment specialist (a registered investment advisor familiar with private placement securities) before the property hit the market. That conversation changed everything.

Instead of selling outright, Tom would execute a 1031 exchange — deferring all capital gains and depreciation recapture by reinvesting the proceeds into a like-kind replacement property. His replacement? An interest in a Delaware Statutory Trust (DST): a professionally managed, institutional-grade real estate investment that qualifies as like-kind property under IRS guidelines.

The plan had three attractions for Tom:

1. The $180,000 tax bill disappears — deferred indefinitely, potentially eliminated entirely at death via step-up in basis
2. He stops being a landlord — a DST is 100% passive; a professional manager handles everything
3. He keeps earning income — DSTs typically generate 4–6% annual cash-on-cash distributions, paid monthly

Tom’s accountant verified he qualified as an accredited investor (net worth comfortably exceeded $1,000,000 excluding his primary home). His advisor explained the legal structure, the risks, and the track record of the DST sponsors they work with. Tom decided to proceed.

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Step 1: Setting Up the Exchange Before Closing

Day −30: Engage a Qualified Intermediary

Before Tom’s property even went under contract, he engaged a Qualified Intermediary (QI) — the independent third party required by IRS regulations to hold the sale proceeds during the exchange. Critical rule: Tom could not touch the money at any point without disqualifying the entire exchange.

The QI prepared the exchange agreement and provided the necessary language for the purchase and sale contract — language that had to be in place before the property closed.

Day 0: Closing Day

Tom’s Phoenix fourplex closed. The title company wired the net proceeds — $1,050,000 after the mortgage payoff and closing costs — directly to the QI’s segregated exchange account. Tom received nothing.

The 1031 clock started the moment closing documents were signed. Tom now had:

• 45 calendar days to identify his replacement property in writing
• 180 calendar days to close on that replacement property

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Step 2: The 45-Day Identification Window

This is the part that makes most real estate investors nervous. In a traditional 1031 exchange, you must find a seller willing to accept your offer, negotiate terms, pass inspections, and secure financing — all within 45 days. In a hot market, that can be nearly impossible.

Tom’s situation was different.

His advisor presented three DST offerings from vetted national sponsors — each a pre-packaged, already-closed institutional property where Tom could invest on his timeline, without seller negotiations or inspection contingencies.

The three offerings on Tom’s short list:

Option 1 — Multifamily DST, Sun Belt Portfolio A diversified portfolio of 847 apartment units across three Sun Belt markets. Institutional operator with 18-year track record. Projected cash-on-cash yield: 5.1%. LTV: 42%.

Option 2 — Net Lease Industrial DST A single-tenant distribution warehouse leased to an investment-grade national retailer on a 12-year NNN lease. Zero landlord responsibilities. Projected cash-on-cash yield: 4.8%. LTV: 38%.

Option 3 — Medical Office DST, Southeast Six medical office buildings anchored by a major regional healthcare system. Leases averaging 8.5 years remaining. Projected cash-on-cash yield: 5.4%. LTV: 45%.

Day 31: Tom filed his identification notice

After reviewing the offering memoranda and consulting with his advisor, Tom identified all three options (using the IRS Three-Property Rule) and submitted his written identification notice to the QI. He still had 14 days to spare.

His advisor’s guidance on the debt replacement requirement: because each DST carries institutional-level leverage, Tom’s proportional share of that debt would satisfy his obligation to replace the $150,000 mortgage from his relinquished property. No additional cash required.

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Step 3: Selecting the DST and Reviewing the Numbers

Tom ultimately chose Option 3 — the Medical Office DST. His reasoning:

• Healthcare real estate has demonstrated resilience through economic cycles
• The long-term NNN leases meant predictable, bond-like income
• The 5.4% projected cash-on-cash yield was the highest of the three, and the Southeast markets showed strong population growth

He invested his full $1,050,000 of exchange proceeds into the DST.

The financial projection for Tom’s position:

Metric	Detail
Total DST investment	$1,050,000
Projected cash-on-cash yield	5.4% annually
Projected annual income	$56,700
Projected monthly income	$4,725
Projected hold period	7–10 years
DST-level debt (replaces Tom’s $150K)	Included in structure

Tom’s proportional share of the DST debt: approximately $185,000 — more than sufficient to replace the $150,000 mortgage he’d paid off at closing. Zero “mortgage boot” triggered.

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Step 4: Closing the DST Investment

Day 44 of the exchange — one day before the 45-day deadline — Tom’s advisor submitted the final subscription documents and investor verification to the DST sponsor.

The QI wired $1,050,000 from the exchange account directly to the DST sponsor. Tom received no cash. He received a DST interest — a fractional ownership stake in the medical office portfolio, qualifying as like-kind replacement property under IRC Section 1031.

The 1031 exchange was complete.

The IRS would see the transaction as: sold investment property → reinvested 100% of proceeds into like-kind replacement property → no taxable event triggered.

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The Outcome: Where Tom Stands Today

Six months after closing, Tom is sitting on his back porch in Scottsdale. He is not fielding maintenance calls. He is not screening tenants. He has not written a rent check demand letter or coordinated a plumbing repair.

Every month, the DST’s property manager — a national commercial real estate firm — deposits $4,725 directly into Tom’s bank account.

Tax picture:

• Capital gains tax deferred: $123,000
• Depreciation recapture deferred: $50,000
• NIIT deferred: ~$7,000
• Total tax deferred: ~$180,000

That $180,000 is still working for Tom. Instead of going to the IRS, it remains invested in the DST, generating returns. At 5.4% annually, that $180,000 alone produces approximately $9,720 in additional income per year that would have otherwise been lost to taxes.

The step-up in basis opportunity: Tom’s estate attorney flagged one more benefit. If Tom holds the DST until death, his heirs receive a stepped-up cost basis — resetting to the fair market value at the time of inheritance. In that scenario, the entire $180,000 in deferred taxes could be eliminated permanently, never owed by Tom or his family. This outcome is not guaranteed and depends on future tax law, but it is the same strategy used by generations of real estate investors to transfer wealth efficiently.

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What Tom Did Right — and What Retirees Often Get Wrong

What Tom did right:

• Engaged his QI and advisor before listing the property — not after
• Identified his replacement property on Day 31, with time to spare
• Worked with an advisor who understood DST-level debt replacement, avoiding an accidental “mortgage boot” tax
• Selected a DST sponsor with a verifiable track record, audited financials, and a clear exit strategy

What retirees often get wrong:

• Waiting until after closing to think about the exchange — disqualifies the QI arrangement
• Identifying only one property — if that deal falls through, the exchange fails
• Overlooking the debt replacement requirement — the most common cause of surprise tax bills
• Choosing a DST based on projected yield alone, without reviewing sponsor track record, property quality, or debt structure

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Key Takeaways

	Traditional Sale	1031 Exchange into DST
Tax bill	~$180,000 due immediately	$0 due — fully deferred
Monthly income	~$3,900/month from reinvested proceeds (5% on ~$870K net)	$4,725/month from full $1.05M
Management responsibilities	Must reinvest and self-manage or hire manager	Zero — completely passive
Estate planning	Heirs inherit with deferred tax liability	Potential step-up in basis at death

The DST path generated roughly $825 more per month in income than the taxable sale would have — simply because the full $1,050,000 stayed invested rather than $870,000.

Over a 7-year hold, that difference compounds to more than $69,000 in additional income, not counting any appreciation in the underlying properties.

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Is a DST Right for Your Situation?

Tom’s story is illustrative — the numbers will be different for every investor based on cost basis, depreciation history, income tax bracket, state taxes, and available DST offerings at the time of your exchange. What won’t be different: the core logic. Every dollar you defer is a dollar that continues working for you.

DSTs aren’t for everyone. They are illiquid investments with a 7–10 year hold horizon, no guarantee of projected returns, and specific accredited investor requirements. But for retiring landlords sitting on significant unrealized gains who are ready to exit active management, they represent one of the most powerful tools available under the U.S. tax code.

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See if a DST makes sense for your situation — download our free guide.

Vestara’s Complete DST 1031 Exchange Guide for Retiring Investors walks through the full process — qualification requirements, how to evaluate DST sponsors, the debt replacement rules, and real examples like Tom’s. It’s free, plain-English, and built specifically for investors approaching retirement.

Download it now at vestara1031.com/guide

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This case study is illustrative and based on a composite fictional investor. Tax outcomes, income projections, and investment returns described are examples only and do not represent any specific investment. DST investments involve risk, including loss of principal, and are illiquid. Past performance does not guarantee future results. This content is for educational purposes only and does not constitute financial, legal, or tax advice. Consult a qualified CPA, attorney, and registered investment advisor before making any investment decisions.