1031 Exchange Case Study: How a DST Transformed a $2.7M Property Into Passive Income

By leveraging a Delaware Statutory Trust (DST) for his 1031 exchange, he converted a high-value land asset into a diversified, professionally managed portfolio, creating a true 1031 exchange success story.

The Challenge: A $2.2M Capital Gains Tax Problem

For decades, a retired engineer held a piece of land he had originally purchased for $500,000. Its value soared to $2.7 million, presenting a fantastic investment return but also a significant tax challenge. Upon selling, he faced a potential capital gains tax bill of over $500,000.

His goals were clear:

• Defer 100% of the capital gains tax.
• Avoid the responsibilities of being a hands-on landlord.
• Generate reliable, passive income for a stress-free retirement.

He needed a solution that was not just tax-efficient, but completely passive. After in-depth consultations with Stephen and Tom from Anchor1031, the perfect strategy emerged: a 1031 exchange into a DST.

The Solution: A Diversified DST Portfolio

Instead of a single replacement property, the engineer utilized a sophisticated DST diversification strategy. He invested his $2.7 million in proceeds into a portfolio of multiple DSTs, allowing him to gain fractional ownership in a variety of high-quality commercial properties.

This strategy was built on three core pillars:

1. What is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust (DST) is a legal entity that holds title to one or more investment properties. For a 1031 exchange, investors acquire a "beneficial interest" in the trust, which the IRS recognizes as a like-kind replacement property under Section 1031. This structure allows investors to own a fractional share of large, institutional-grade real estate without direct management duties.

Source: IRS Revenue Ruling 2004-86 established the framework for DST eligibility in 1031 exchanges.

2. Strategic Diversification Across Assets and Markets

The engineer's $2.7 million was spread across a diverse portfolio designed to mitigate risk:

This multi-faceted approach is a cornerstone of a sound DST diversification strategy, protecting capital by not concentrating it in a single asset or market.

3. Leveraging Debt to Enhance Returns and Meet Exchange Requirements

A key advantage of the Delaware Statutory Trust 1031 structure is its use of pre-arranged, non-recourse financing. The engineer's $2.7 million in equity was used to acquire $5.2 million worth of property, satisfying his 1031 exchange requirement to replace both equity and debt.

Benefits of this built-in leverage include:

• No Personal Loan Guarantees: The debt was secured by the properties themselves, with no personal liability for the engineer.
• Increased Depreciation: The leveraged portion of the acquisition increased his potential for depreciation deductions, which can help shelter income from taxes.
• Simplified Exchange: He avoided the complex and time-consuming process of applying for his own loans within the tight 45-day identification window of a 1031 exchange.

The Outcome: Peace of Mind and Passive Real Estate Investing

By working with Stephen and Tom at Anchor1031, the retired engineer achieved all his goals:

His wealth is now professionally managed, aligned with his goals for a hands-free retirement, and structured for long-term, tax-efficient growth.

Ready to Start Your 1031 Exchange Journey?

If this case study resonates with your investment goals, Anchor1031's team of specialists can help you navigate your own tax-deferral strategy. With over $1B+ in real estate syndications and 300+ completed 1031 transactions, we provide the professional knowledge and support you need for a successful exchange.

Don't let capital gains taxes erode your wealth. Contact Anchor1031 at (502) 556-1031 to discover how a 1031 exchange can help you build lasting wealth through passive real estate investing.