CPAs? Pro 1031ers?

Selling a $225,000 home. $16,000 expenses (prop taxes which become BOOT, commissions, and $5000 Seller concession toward their closing costs.

Leaves me with $209,000 to 1031 into a DST paying 5.1% = $10,659 income per year.

I usually pay the prop taxes outside the closing to avoid extra bookkeeping because it becomes BOOT

(BOOT is money received at closing from the buyer which covers MY bills and the IRS says is not a tax deductible expense of the closing process as it relates to the 1031. This BOOT income is considered taxable income.)

OR

Pay ALL $16,000 expenses outside of closing to keep the amount I 1031 into the DST higher $225,000 x 5.1% = $11,475 income per year, and take a tax deduction of $16,000 from my 2026 income.

I like this approach because

-I get a one time $16,000 tax shelter on my 2026 income

-$816 more income per year, x 10 years = $8160 more income

Pros - am I missing something?

Several people at the REtreat asked me about this so here's more info to consider.

Before anyone has a cow about low 5.1% return, I bought this home for $60,000 cash, no interest paid, and the renters reimbursed me YEARS ago plus plus plus. I estimate close to $200,000 AFTER recouping my $60.,000 So theoretically I'm making $10,659 /year on an investment of zero!

And I was clearing about $10,000 per year with the hassles of advertising, leasing, repairing, collecting, evicting, prop taxes... so I'm making as much without lifting a finger.

It's not "mailbox money", it's "direct deposit into Momma's checking account" money!

Quick explanation of a DST Delaware Statutory Trust:

I buy a "share" of a giant RE investment like a Hotel, shopping center, factory, etc.

I OWN a piece of that RE but do not touch anything. A silent partner.

I am paid a return on that investment.

I 1031 my depreciated property into a DST so the full amount when I sell goes to the new investment, not a penny to the IRS.

This saves me A TON on tax money, even with capital gains' lower rate.

The entire sales price rolls over and continues to create income.

The DSTs I have been investing in are single groups which hold multiple properties. One investment is group of commercial RE in various states which include a Home Depot, Dollar General, Tractor Supply, Sprouts Grocery, Verizon store, and Kidney Dialysis office.

As an owner, when they sell I share in the increased value.

(I am not a professional advisor, just an investor sharing my experience)

PS

The DST only owns the real estate and leases to Home Depot, Tractor Supply, etc.

THE DST does not operate these businesses. Is just the LL like us.

I am no expert but if they would become boot then I would pay outside of closing and you would get hit twice. You would pay tax on the boot and have a lower investment.

So for those that have done DSTs:

How long have you been doing it?

Has the money worked out as promised?

Do you miss the "control" since with a DST you have no control and you are along for the ride?

Has anyone had to get out of a DST?

How hard was it to sell your minority position?

What kind of fees were / are there in your DST?

What surprises did you find that you wish you knew sooner?

I’m really enjoying this conversation. I don’t know much about 1031 exchanges, but I recently learned that depreciation on a replacement property isn’t as straightforward as I assumed. In a 1031, it is my understanding the depreciation from the property you sell carries over, and the depreciation on the new asset is split between the old basis and any new value added, which makes it more complicated than a clean reset.

You are correct about the real estate taxes being called boot so you might want to buy slightly more than the 209,000. Maybe 220,000 if you want to go the DST route.

The purpose of a DST is asset preservation. Doing it when you think the market has just about peaked is not a bad idea. Am I fond of them? I would use a DST if I had a spare $50,000 where I couldn't find a home for it. Pa just recently acknowledged 1031, and they have not mastered the idea of a partial 1031 exchange which isn't an issue for the feds. So who knows what is up about your state.

Why am I not a huge fan of DSTs? There are sales fees on them. Additionally, they control your sales timeline for when you sell. Of course, they will have another DST with the sale load in it. They will have their own 1031 company doing the work. You can't sell your part of the DST if you needed to on the open market. At best, maybe, just maybe - the manager of the fund might offer a low-ball offer.

Where I absolutely love the premise of DSTs, it how the operate which makes them different than OGM or a standard NN/NNN purchase. Too bad the timing doesn't line up with me, as I am eyeing a smaller NN/NNN in the spring time.

Brad,

If you decided to keep the cash and not do a 1031 and DST, how much would you have to pay in taxes on the $209,000?

Thanks

A DST is not a silver bullet. In my eyes it has only one purpose and that is to avoid paying taxes. It’s not about the return as making 5-6% is not particularly difficult. I agree with Ray. I would only use them for leftover money or if I am just looking to get out but still a ways from well you know…

If you keep the money you would pay capital gains as well as well as depreciation's recapture. It ends up being quite a lot.

Yes depreciation is not straight forward. Your previous depreciation carries to the new property.

I have two that I purchased 6 months back. They were originally paying 5%. One as of this month lowered the return to 4.5%.

The fees are taken out before the return is calculated. The management fees are continuous but they are also calculated before your return.

I have never gone full cycle so I can’t comment on that but I have heard that selling your position can be difficult. The DST can also sell out at any time so you could potentially have to look for another investment in 3 years when you were expecting 7-10.

I hope that answers some questions.

Bonanza

I do not miss the control at all. Granted it is just a small part of a larger portfolio but I would consider doing more if the returns were bit higher. Just have the money show up in my account every month is nice.

I started looking for potential properties when I was reasonably sure my deal would close. That was at least a couple of months before it actually closed. So so I had 60 days plus 45 days. I took some risk by signing contracts in advance that were subject to close but put up a small portion that was not refundable if I did not close by a specific date. It was worth the risk to get the properties I wanted.

As I understand and in my experience:

MY motivation: this is our 49th year. I don't want to be doing rentals til I'm 89 like a fellow local LL, or dead so my kids can inherit at a stepped up basis!

I almost died from prostate cancer and Wifey recently recovered from uterine cancer surgery. If anything happens to me SHE can live VERY comfortably on the monthly cash flow from these DSTs and just roll them into the next DST when the time comes.

Your kids don't want your RE.

But they will be super happy to inherit a fund that drops cash into their bank account every month with zero effort. A legacy of cash income, not real estate to handle.

The returns are low compared to what we can make with highly ACTIVE RE investing/flipping/renting. Key word: WORK!

Like many readers here I bought these at a lower price, they are paid off, have made me TONS of cash flow over the years to recoup my investment...but must continually be managed and repaired/upgraded.

Those awesome upgrades I made 10, 20 years ago are now outdated or worn and must be upgraded again to re-rent!

Equity does not make us money. So I'm cashing in on that new higher equity that was FREE - GIVEN to me by the market.

I did not have to work to add value. (We do spruce them up for the sale but not rehab)

5.1% DST on $225k is the same as 19% on my original $60k investment AS A SILENT PARTNER - NO WORK, NO EMPLOYEES, NO HASSLES! But remember I already got all that and more back in rent.

Me? Many of my props are totally or mostly depreciated out so I've lost that tax shelter, which means my taxes have gone up as the depreciation evaporates.

Caution to those who use advanced depreciation/cost segregation - it's fun now but you will quickly lose that tax shelter and then the required depreciation recapture when you sell will be brutal.

More to come.

I continued my answers on a new thread WHY 1031 TO DST, Feb 6.