When you sell appreciated investment real estate, the headline price is not what you keep. Selling outright triggers federal capital-gains tax, state income tax where applicable, depreciation recapture (taxed at up to 25% on the depreciation you previously deducted), and potentially the 3.8% net investment income tax (NIIT) — collectively a large bite that reduces the capital you have left to reinvest. A 1031 exchange into a Delaware Statutory Trust (DST) defers all of that, keeping your full pre-tax equity working in income-producing real estate, where it can compound over time. This guide runs the math: the true cost of selling outright, how deferral compounds, an illustrative side-by-side example, after-tax income compared, and the situations where selling and paying the tax still makes sense. All figures here are illustrative only and not a promise of results — DST interests are securities offered to accredited investors, distributions are projections that are not guaranteed, and Baker 1031 does not provide tax or legal advice. Verify the current rules and your specific numbers with your CPA.
The Cost of Selling Outright
Selling an appreciated rental property outright is more expensive than most owners expect, because several taxes stack on top of one another. The first is federal long-term capital-gains tax on your appreciation — the difference between your sale price (net of costs) and your cost basis — generally taxed at 0%, 15%, or 20% depending on your income. On top of that, many states impose their own income tax on the gain, which in higher-tax states can add several more percentage points to the total.
Two further layers often surprise sellers. Depreciation recapture applies to the depreciation you deducted over your holding period: that portion of the gain is taxed as 'unrecaptured Section 1250 gain' at a federal rate of up to 25%, regardless of your ordinary bracket. And the 3.8% net investment income tax (NIIT) can apply to investment gains for higher-income taxpayers. Stack federal capital gains, state tax, recapture, and NIIT together, and a meaningful share of your gain — in some cases a quarter to a third or more — can go to tax, leaving you less capital to reinvest.
So the cost of selling outright is the combined bite of federal capital-gains tax, state income tax, depreciation recapture, and the NIIT — a stack that can consume a large portion of your gain and shrink the equity you have left. The cost of selling outright — federal capital-gains tax (0%/15%/20%), state income tax where applicable, depreciation recapture taxed at up to 25% on prior depreciation, and the 3.8% NIIT for higher earners — is the layered tax that reduces your reinvestable capital when you sell appreciated real estate without a 1031 exchange. The total can be substantial. Understanding this cost frames why deferral matters. Selling outright stacks federal capital gains, state tax, depreciation recapture (up to 25%), and the 3.8% NIIT, which together can consume a large share of your gain and leave you with materially less to reinvest.
How DST Deferral Compounds
The power of a 1031 exchange into a DST comes from keeping your full pre-tax equity working. When you exchange instead of selling, you defer the entire tax stack — capital gains, state tax, recapture, and NIIT — so the dollars that would have gone to the IRS and your state stay invested in income-producing real estate. That larger base of equity is what compounds: more capital working means a larger potential income stream and a larger base on which future appreciation, if any, can build.
Consider the difference conceptually. If selling outright would cost you, say, a quarter of your gain in tax, you reinvest only the after-tax remainder; in a 1031 into a DST, you reinvest the whole amount. Over a multi-year hold, the gap between 'full equity working' and 'after-tax equity working' can widen, because the deferred tax dollars are themselves generating potential income and growth rather than sitting in the Treasury. And if you continue to exchange — DST to DST, or DST into a 721 UPREIT — you can keep deferring; at death, a step-up in basis under Section 1014 can erase the deferred gain for your heirs entirely.
So deferral compounds because it keeps your entire pre-tax equity invested, so the dollars you would have paid in tax keep working for you over the holding period. How DST deferral compounds — by deferring the full tax stack so your entire pre-tax equity stays invested in income-producing real estate, where the dollars that would have gone to tax keep generating potential income and growth, with the option to keep deferring through further exchanges or to reach a step-up at death — is the core advantage over selling outright. More equity working compounds over time. Understanding this shows the long-run value of deferral. DST deferral compounds by keeping your full pre-tax equity invested, so the tax dollars you would have paid keep working — and continued exchanges or a step-up at death can extend or erase the deferral entirely.
Selling outright reinvests what's left after tax; a 1031 into a DST reinvests the whole amount — and over years, the dollars you didn't hand to the IRS keep working for you.
Side-by-Side Example
Consider an illustrative example — figures are hypothetical and not a promise of results. Suppose an investor sells a fully depreciated rental for $1,000,000 net of selling costs, with a cost basis of $300,000, producing a $700,000 gain (of which, say, $250,000 is prior depreciation subject to recapture). If they sell outright, they might owe roughly 20% federal capital-gains tax on the appreciation, up to 25% recapture on the depreciation portion, the 3.8% NIIT, and state income tax — which, blended, could total in the neighborhood of $200,000–$250,000 of tax in a higher-tax state. That leaves roughly $750,000–$800,000 to reinvest.
Now suppose the same investor instead does a 1031 exchange into one or more DSTs. They defer the entire tax stack, so the full $1,000,000 of equity goes to work in income-producing real estate. The difference — on the order of $200,000–$250,000 in this illustration — is capital that stays invested rather than being paid in tax. At an illustrative target distribution rate (projections only, never guaranteed), that extra equity could generate additional annual income, and it remains part of the base that may appreciate or be exchanged again later. These numbers are purely illustrative to show the mechanics, not a prediction.
So the side-by-side shows the gap plainly: selling outright leaves you reinvesting the after-tax amount, while a 1031 into a DST keeps the full pre-tax equity working — a difference that, in this illustration, is well into six figures. The side-by-side example — an illustrative $1,000,000 sale with a $700,000 gain, where selling outright might cost roughly $200,000–$250,000 in combined federal, state, recapture, and NIIT tax (leaving ~$750,000–$800,000 to reinvest), versus a 1031 into a DST that defers all of it and keeps the full $1,000,000 working — quantifies the deferral advantage. Figures are hypothetical, not promises. Understanding the example makes the math concrete. In an illustrative $1,000,000 sale, selling outright might leave roughly $750,000–$800,000 after tax, while a 1031 into a DST keeps the full $1,000,000 invested — a six-figure difference in working equity, shown for illustration only.
After-Tax Income Compared
The most practical way investors feel the difference is in income. Because a 1031 exchange into a DST keeps more equity invested, that larger base can generate a larger potential income stream than the smaller, after-tax base left by an outright sale. The logic is simple: if you have $1,000,000 working rather than $800,000, then at any given distribution rate the larger base produces more dollars of income — illustratively, the extra $200,000 at a hypothetical 5% target rate would be about $10,000 more per year (projections only, not guaranteed).
There is also a character difference. DST distributions are often partially sheltered by depreciation passed through to investors, so a portion of the income may be tax-advantaged in a given year, while income from reinvesting an after-tax lump sum elsewhere may be fully taxable. The point is not that DSTs guarantee more income — they don't, and distributions can vary or be suspended — but that keeping more equity working gives the larger base a structural head start on potential income. As always, actual results depend on the specific DSTs, their performance, and market conditions, none of which are promised.
So after-tax income compared favors the larger base: more equity working through a 1031 into a DST gives a bigger pool from which potential distributions are drawn, all else equal. After-tax income compared — the larger equity base preserved by a 1031 into a DST producing more potential income at any given distribution rate than the smaller after-tax base left by an outright sale, with DST distributions often partly sheltered by pass-through depreciation — illustrates the income advantage of deferral. Income is never guaranteed and figures are illustrative. Understanding this shows the day-to-day impact. Keeping more equity working through a DST gives a larger base for potential distributions, so at any given rate it can produce more income than a smaller after-tax base — illustratively, though distributions are projections and never guaranteed.
- Selling outright stacks federal capital gains, state tax, depreciation recapture (up to 25%), and the 3.8% NIIT, shrinking your reinvestable equity.
- A 1031 exchange into a DST defers the entire tax stack, keeping your full pre-tax equity working and compounding over time.
- Illustrative math: on a $1,000,000 sale with a $700,000 gain, selling might cost ~$200,000–$250,000 in tax — capital a DST keeps invested (figures hypothetical).
- Selling still makes sense when you need the cash, the gain is small, or you want out of real estate entirely — match the choice to your goals.
When Selling Still Makes Sense
Deferral isn't always the right answer — there are clear situations where selling and paying the tax is the better choice. The most obvious is when you simply need the cash: if you're selling to fund a major purchase, a business, retirement spending, or to pay off debt, deferring into an illiquid DST that ties up your capital for years (typically five to seven, with no ready secondary market) would defeat the purpose. A 1031 exchange only makes sense if you intend to keep the equity invested in real estate.
Selling can also make sense when the gain — and therefore the tax — is small. If you have little appreciation or depreciation to recapture, the tax bite may be modest, and the cost, complexity, and illiquidity of a DST exchange may not be worth it. And selling makes sense when you genuinely want out of real estate entirely: if your goal is to exit the asset class, simplify your estate, or move into liquid investments, paying the tax and being done can be the cleaner path. A DST keeps you in real estate, just passively — so it's a fit only if real estate exposure is still what you want.
So selling still makes sense when you need the cash, the gain is small enough that the tax is modest, or you want to leave real estate altogether — situations where deferral's benefits don't outweigh the trade-offs. When selling still makes sense — when you need liquid proceeds for spending or other purposes, when the gain (and thus the tax) is small enough that a DST's cost and illiquidity aren't justified, or when you want to exit real estate entirely rather than stay invested passively — is the honest counterpoint to deferral. A DST fits only if you want to keep equity in real estate. Understanding when to sell keeps the decision grounded. Selling and paying the tax makes sense when you need the cash, the gain is small, or you want out of real estate entirely — because a DST keeps your capital invested, illiquid, and in the asset class.
Deferral is powerful, but it isn't free: a DST keeps your equity locked in real estate for years, so if you need the cash or want out of the asset class, paying the tax can be the smarter move.
Running Your Own Numbers
The illustrative figures above show the mechanics, but your decision should rest on your own numbers, run with your CPA. Start by estimating the true cost of selling: calculate your gain (sale price net of costs, minus your adjusted basis), separate the depreciation portion (taxed at up to 25%), apply your federal capital-gains rate, add your state's rate, and check whether the 3.8% NIIT applies. That total is the capital you'd lose to tax by selling outright — and the amount a 1031 into a DST would keep working.
Then weigh that against your goals and constraints. How long do you want to stay invested in real estate? Do you need liquidity in the next several years? Are you comfortable with passive, fractional ownership and the fees and illiquidity that come with a DST? Would a step-up in basis at death (which can erase the deferred gain for heirs) factor into your estate plan? The math is only half the decision; the other half is whether a DST's structure — passive, diversified, illiquid, accredited-only — actually fits your situation. Running both halves together, with professional guidance, gives you a real answer rather than a rule of thumb.
So running your own numbers means calculating your specific tax cost of selling, then weighing it against your liquidity needs, time horizon, and estate goals to decide whether deferral is worth it. Running your own numbers — estimating your specific combined tax on a sale (capital gains, state, recapture, NIIT), then weighing that figure against your liquidity needs, time horizon, comfort with illiquidity and fees, and estate-planning goals — turns the illustrative math into a real decision tailored to you, ideally with your CPA. The numbers and the fit both matter. Understanding how to run them keeps the choice personal. Run your own numbers with your CPA: calculate your real tax cost of selling, then weigh it against your liquidity needs, horizon, and estate goals to decide whether a 1031 into a DST is right for you.
How Baker 1031 Helps You Run the Math
Baker 1031 Investments helps investors weigh selling and paying the tax against a 1031 exchange into a DST — understanding the cost of selling outright, how deferral compounds, an illustrative side-by-side, after-tax income compared, and when selling still makes sense — so you can make an informed decision grounded in your own numbers and goals.
DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review; they are not suitable for everyone, and they are illiquid, fee-bearing, and longer-term. Baker 1031 does not provide tax or legal advice — your CPA and attorney calculate your specific tax on a sale (capital gains, state tax, depreciation recapture, and the NIIT) and confirm how a 1031 exchange and any step-up at death apply to your situation. We help you understand the structure and the trade-offs, coordinate the 1031 timeline with your qualified intermediary, evaluate suitable DST offerings, and, when appropriate, access them. All figures we discuss are illustrative only — distributions and returns are projections, never guaranteed, and past performance does not predict future results. Our role is to help you see the math clearly and exchange only when a DST genuinely fits your goals, liquidity needs, and risk tolerance.
Frequently Asked Questions
What taxes do I pay if I sell my rental property outright?
Selling appreciated investment real estate outright typically triggers a stack of taxes. First, federal long-term capital-gains tax on your appreciation — generally 0%, 15%, or 20% depending on your income. Second, state income tax on the gain in states that impose it, which in higher-tax states can add several percentage points. Third, depreciation recapture: the portion of your gain attributable to depreciation you previously deducted is taxed as unrecaptured Section 1250 gain at a federal rate of up to 25%, regardless of your ordinary bracket. Fourth, the 3.8% net investment income tax (NIIT) can apply to investment gains for higher-income taxpayers. Stacked together, these can consume a substantial share of your gain — in some cases a quarter to a third or more — leaving less to reinvest. A 1031 exchange into a DST defers all of them. Verify your specific figures with your CPA, since rates and thresholds depend on your situation.
How does a 1031 exchange into a DST save me money?
A 1031 exchange into a DST doesn't make tax disappear — it defers it. Instead of paying federal capital gains, state tax, depreciation recapture, and the 3.8% NIIT when you sell, you roll your full pre-tax equity into a DST and defer the entire tax stack. The 'savings' come from keeping that whole amount working in income-producing real estate rather than handing a large slice to the government. Over a multi-year hold, the dollars you would have paid in tax keep generating potential income and growth, so the larger equity base can compound. You can keep deferring by exchanging again (DST to DST, or DST into a 721 UPREIT), and at death a step-up in basis under Section 1014 can erase the deferred gain for your heirs entirely. So a 1031 into a DST preserves capital and lets it compound. These are mechanics, not promises — distributions and returns are never guaranteed.
What is depreciation recapture and why does it matter?
Depreciation recapture is the tax on the depreciation deductions you claimed during your ownership of a rental property. While you owned the property, you likely deducted depreciation each year, which reduced your taxable income and lowered your adjusted cost basis. When you sell, the IRS 'recaptures' the benefit of those deductions: the portion of your gain attributable to depreciation is taxed as unrecaptured Section 1250 gain at a federal rate of up to 25% — higher than the long-term capital-gains rate on the rest of your appreciation. For investors who have held a property for many years and depreciated it heavily, recapture can be a large, surprising part of the tax bill on a sale. It matters because it raises the true cost of selling outright above what people expect from the capital-gains rate alone. A 1031 exchange into a DST defers recapture along with the rest of the tax stack. Confirm your recapture exposure with your CPA.
Is the math in this article a guarantee of results?
No. Every figure in this article — the $1,000,000 sale, the $700,000 gain, the roughly $200,000–$250,000 of illustrative tax, the after-tax income comparisons — is purely illustrative and hypothetical, used to show the mechanics of deferral, not to predict or promise any outcome. Your actual numbers depend on your sale price, basis, depreciation history, state of residence, income level, and the specific DSTs involved, all of which differ from the example. DST distributions are projections, not guarantees: they can vary, be reduced, or be suspended, and the underlying real estate can lose value. Past performance does not predict future results. The article is educational, designed to help you understand how the comparison works so you can run your own numbers with your CPA. Treat the figures as illustrations of the math, not as a forecast of what you would experience. Always verify with qualified tax and investment professionals before acting.
How much more income could a DST produce than selling and reinvesting?
The potential income difference comes from how much equity stays invested. Because a 1031 exchange into a DST defers the tax stack, more of your equity keeps working than if you sold, paid tax, and reinvested the after-tax remainder. At any given distribution rate, a larger base produces more income — illustratively, if deferral preserves an extra $200,000 and a DST targets a hypothetical 5% distribution, that extra equity might generate roughly $10,000 more per year (a projection, not a guarantee). DST distributions are also often partly sheltered by depreciation passed through to investors, so a portion may be tax-advantaged. But this is not a promise that DSTs produce more income: distributions can vary or be suspended, and performance depends on the specific properties and market conditions. The structural point is that keeping more equity working gives the larger base a head start on potential income. Run your own figures with your advisors, treating all numbers as illustrative.
When does it make more sense to sell and pay the tax?
Selling and paying the tax makes more sense in several situations. First, when you need the cash — if you're selling to fund a purchase, a business, retirement spending, or to pay off debt, locking your equity into an illiquid DST for five to seven years would defeat the purpose. Second, when the gain (and therefore the tax) is small — if you have little appreciation or depreciation to recapture, the tax bite may be modest, and a DST's cost, complexity, and illiquidity may not be worth it. Third, when you want out of real estate entirely — if your goal is to exit the asset class, simplify your estate, or move into liquid investments, paying the tax and being done is cleaner, because a DST keeps you invested in real estate, just passively. So a 1031 into a DST is a fit only if you want to keep equity working in real estate. If any of these apply, selling can be the smarter move.
Are DSTs liquid if I change my mind after exchanging?
No — DSTs are illiquid, and this is a key reason to be sure before exchanging. A DST interest is a beneficial interest in a trust that holds real estate, typically held for a full cycle of about five to seven years until the sponsor sells the underlying property. There is no public exchange and no reliable secondary market for DST interests, so you generally cannot sell on demand if your circumstances change. You're committing your equity for the duration of the hold. This illiquidity is why a 1031 into a DST is appropriate only for capital you can leave invested, and why investors who might need their money in the near or medium term — or who simply want flexibility — may be better off selling, paying the tax, and keeping their proceeds liquid. Before exchanging, confirm you won't need the capital during the expected hold. The illiquidity is a real constraint, not a technicality, so weigh it carefully against your liquidity needs.
Does a 1031 exchange into a DST ever eliminate the tax, not just defer it?
A 1031 exchange itself defers tax rather than eliminating it — the deferred gain carries forward into your replacement DST. However, the deferral can become permanent through estate planning. Under Section 1014, when you die, your heirs generally receive a step-up in basis to the property's fair market value as of your death. That step-up can erase the deferred capital gain entirely for your heirs, so the tax you kept deferring through one or more exchanges may never be paid. This 'swap till you drop' strategy — exchanging repeatedly and holding until death — is a common reason investors use DSTs for long-term, multi-generational planning. Note that estate-tax rules and basis rules are technical and can change, and they apply to your specific situation, so this is not tax advice. Baker 1031 does not provide tax or legal advice. Confirm with your CPA and estate attorney how the step-up and deferral would work for you before relying on this strategy.
What is the 3.8% NIIT and does it apply to my sale?
The net investment income tax (NIIT) is an additional 3.8% federal tax on certain investment income, including capital gains, for higher-income taxpayers. It applies when your modified adjusted gross income exceeds certain thresholds, and it stacks on top of your regular capital-gains tax, state tax, and any depreciation recapture when you sell investment real estate. For many investors selling an appreciated property, the gain pushes income above the threshold, so the NIIT applies to at least part of the gain — adding 3.8% to an already layered tax bill. A 1031 exchange into a DST defers the gain, which can keep it from triggering the NIIT in the year of sale. Whether and how much the NIIT applies depends on your total income and filing status, so the exact impact is specific to you. Baker 1031 does not provide tax advice; confirm with your CPA whether the NIIT applies to your situation and how a 1031 exchange would affect it.
How do DST distributions get taxed compared to other income?
DST distributions are generally treated as income from the underlying real estate, which the DST passes through to you as a beneficial owner. A portion of each distribution is often sheltered by depreciation that the DST passes through, so part of the income may be tax-advantaged in a given year rather than fully taxable — similar to how depreciation shelters income from a directly owned rental. This can make DST income more tax-efficient than, say, fully taxable interest income from reinvesting an after-tax lump sum. The exact treatment depends on the DST's depreciation, your basis, and your tax situation, and the DST reports the details to you (often via a grantor letter or similar statement) rather than a K-1. Because the character of DST income is technical and specific to you, confirm the treatment with your CPA. Baker 1031 does not provide tax advice. The general point is that pass-through depreciation can make DST distributions partly tax-advantaged, which factors into the after-tax income comparison.
What are the costs and fees of doing a DST instead of selling?
A DST carries costs that an outright sale doesn't, and you should weigh them in the math. DST offerings typically include an upfront load — selling commissions, dealer-manager fees, and organizational and offering costs — plus ongoing asset-management and property-level fees, all of which reduce the capital ultimately deployed and the net income you receive. There may also be the cost of a qualified intermediary for the 1031 exchange. These fees are a real trade-off: deferral keeps more equity working, but fees take a slice of it, so the net benefit depends on the specific offering and how long you hold. By contrast, an outright sale has transaction costs but no ongoing DST-style fees. The right comparison weighs the tax you'd defer against the fees you'd pay. Review every offering's fee structure carefully before exchanging. Baker 1031 helps you understand these costs so the comparison is honest, but fees vary by offering, so confirm them in the specific DST's documents.
Can I do a partial exchange — defer some and cash out some?
Yes, a partial 1031 exchange is possible, and it can be a middle path between deferring everything and selling outright. In a partial exchange, you reinvest part of your proceeds into replacement property (such as a DST) and take the rest as cash, called 'boot.' The portion you keep as boot is taxable — you'll owe capital-gains tax, recapture, and any NIIT on it — while the portion you properly reinvest continues to defer. This lets you free up some liquidity while still sheltering most of your gain. It's useful when you need some cash but want to keep the majority of your equity working tax-deferred. The mechanics and tax on the boot are specific to your numbers, and the 1031 rules (equal-or-greater equity and debt replacement on the deferred portion) still apply. Baker 1031 does not provide tax advice; work with your CPA and qualified intermediary to structure a partial exchange correctly so the deferred portion qualifies.
How long do I have to complete a 1031 into a DST?
The 1031 timeline is strict and starts when you close on the sale of your relinquished property. You have 45 calendar days to formally identify your replacement property (or properties) in writing, and a total of 180 calendar days to close on the replacement. There are no extensions for weekends or holidays, and missing either deadline generally disqualifies the exchange, making the whole gain taxable. DSTs are well-suited to this timeline because they're pre-packaged and can often close quickly — sometimes in days — which makes them useful as a primary replacement or as a backup identified within the 45-day window in case another deal falls through. To preserve the exchange, you must use a qualified intermediary to hold the proceeds; you cannot take possession of the funds. Because the deadlines are unforgiving, plan ahead and line up your DST options early. Baker 1031 helps coordinate the timeline with your qualified intermediary so you don't miss a deadline.
Who is eligible to invest in a DST?
DST interests are securities offered under Regulation D, typically Rule 506(c), to accredited investors only. To be accredited, an individual generally must have earned income exceeding $200,000 (or $300,000 with a spouse) in each of the prior two years with the expectation of the same, or a net worth over $1 million excluding the value of a primary residence; certain professional certifications also qualify, and entities can qualify by asset or ownership tests. Because DSTs are offered through a broker-dealer, you'll also go through a suitability review that considers your financial situation, goals, liquidity needs, and risk tolerance before investing. So eligibility has two parts: meeting the accredited-investor standard, and passing a suitability review. If you don't meet the accredited standard, a DST 1031 exchange generally isn't available to you, and you'd consider other replacement-property options. Confirm your accredited status with your advisors. Baker 1031 verifies accreditation and suitability before any DST recommendation, as required by securities rules.
How does Baker 1031 help me decide whether to sell or exchange?
We help investors weigh selling and paying the tax against a 1031 exchange into a DST — the cost of selling outright, how deferral compounds, an illustrative side-by-side, after-tax income compared, and when selling still makes sense — so you can decide based on your own numbers and goals. DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review; they're illiquid, fee-bearing, and longer-term. Baker 1031 does not provide tax or legal advice — your CPA and attorney calculate your specific tax on a sale (capital gains, state, recapture, NIIT) and confirm how a 1031 and any step-up at death apply to you. We help you understand the structure and trade-offs, coordinate the 1031 timeline with your qualified intermediary, evaluate suitable DST offerings, and access them when appropriate. All figures we discuss are illustrative; distributions and returns are projections, never guaranteed, and past performance doesn't predict future results. We help you exchange only when a DST genuinely fits your goals.
Glossary
- 1031 Exchange
- A like-kind exchange that defers tax on investment real estate.
- Delaware Statutory Trust (DST)
- 1031-eligible fractional interest in income-producing real estate.
- Capital-Gains Tax
- Federal tax on appreciation, generally 0%, 15%, or 20%.
- Depreciation Recapture
- Tax up to 25% on previously deducted depreciation at sale.
- Net Investment Income Tax (NIIT)
- A 3.8% tax on investment income for higher earners.
- State Income Tax
- A state's own tax on the gain where applicable.
- Cost Basis
- Your investment in the property, used to figure gain.
- Adjusted Basis
- Cost basis reduced by depreciation and adjusted by improvements.
- Tax Deferral
- Postponing tax by exchanging rather than selling outright.
- Boot
- Cash or non-like-kind value taken in an exchange, taxable.
- Qualified Intermediary (QI)
- The party that holds proceeds to keep a 1031 valid.
- Step-Up in Basis (§1014)
- Basis reset at death that can erase deferred gain.
- Pass-Through Depreciation
- Depreciation a DST passes to investors, sheltering income.
- Distribution Rate
- Projected income as a percentage of invested equity.
- Accredited Investor
- An investor meeting income or net-worth thresholds for DSTs.
- Full Cycle
- A DST's life from offering through sale of the property.
Sources & References
- IRS. Like-Kind Exchanges — Real Estate Tax Tips
- Cornell Legal Information Institute. 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment
- Cornell Legal Information Institute. 26 U.S. Code § 1014 — Basis of property acquired from a decedent
- IRS. Revenue Ruling 2004-86
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
