Many of our clients reach a point in life where they are ready to simplify. The properties that once felt like smart investments start to feel like obligations. If you own rental properties and are approaching retirement, you are likely thinking about how to exit without handing a large check to the IRS.
The Delaware Statutory Trust, or DST, comes up often in these conversations. It is worth understanding both the appeal and the limitations before deciding whether it is the right path for your situation.
The Tax Problem You Are Actually Facing
Before getting into solutions, it helps to understand the full scope of the tax exposure.
Real estate has long been promoted for its tax advantages. You can write off depreciation, offset gains, and build wealth in a tax-advantaged way. The catch is that when you sell, all of that depreciation gets recaptured.
Let me put some numbers to it. Say you bought a property for $1 million and it is now worth $2 million. You might expect to pay tax only on that $1 million in appreciation. But if the property has been fully depreciated, you are potentially paying tax on the entire $2 million. That is a materially different number than most people anticipate when they start thinking about selling.
The 1031 Exchange: Kicking the Can
The traditional way to defer those gains is a 1031 exchange. You sell the property for $2 million, buy another property for $2 million, and the IRS allows you to defer the gain into that new asset. It is a clean mechanism, and it gives the new property room to appreciate further.
The problem, of course, is that you still own a property. You still have to manage it. For someone looking to retire and step back from active involvement, a standard 1031 exchange does not solve the underlying problem.
What a Delaware Statutory Trust Actually Is
A DST is essentially a 1031 exchange into a passive ownership vehicle. Think of it as a real estate fund. You sell your rental property and invest the proceeds into this fund, which might own apartment buildings or commercial properties. The gain is deferred, just as it would be in a traditional 1031 exchange, but you are no longer managing anything. Someone else handles the real estate, and you hold a passive ownership interest.
For someone nearing retirement who wants to exit active property management without triggering a large tax event, that combination has real appeal.
The Advantages Are Real
Two things work in a DST’s favor.
First, you get the tax deferral. You are not writing a check to the IRS when you exit your rentals.
Second, you are done managing properties. You have effectively passed on the tax liability and the operational responsibility at the same time. That is meaningful if the day-to-day work of being a landlord no longer fits your life.
The Limitations Are Also Real
Before letting the tax bill drive your decision, it is worth stepping back and asking a foundational question: would paying the tax actually derail your financial plans?
It is easy to look at a large tax number and decide to avoid it at all costs. But sometimes “avoiding at all costs” means investing in something that is not well suited to your situation. The tax bill is real, but so are the tradeoffs involved in a DST.
Here is what you give up.
Control. Once you are in a DST, you lose the ability to decide when the underlying properties are sold. If the fund decides to sell and passes the gains on to you, you cannot hold on, gift to children, or restructure through a family partnership. You have given up the optionality that comes with direct ownership.
Fees. You are looking at upfront costs in the range of 10% just to get in. Then there are ongoing management fees, typically around 1% annually, plus the property management fees on the underlying assets. Those never go away. You are simply adding a sponsor fee on top of the existing cost structure.
Due diligence still required. Just as you had to evaluate properties before buying them, you need to evaluate the DST before investing. If the underlying investments do not produce a return that justifies the fee structure and loss of control, it may be better to pay the taxes and invest in something more liquid and transparent.
Other Options Worth Considering
A DST is not the only way to simplify. A few alternatives are worth considering before you decide.
One option is consolidating through a traditional 1031 exchange. If you have two residential rentals that require constant attention, you might be able to exchange both into a single commercial property, such as a triple net lease, that requires far less active management. You still own real estate, but the time commitment drops significantly.
Another option is passing the management responsibility to the next generation. If you have children who are interested in taking on the properties, you can still be the owner of record from the IRS perspective while stepping back from daily involvement. This keeps the real estate in the family and avoids triggering a taxable event.
The Decision Framework
The right path depends on whether the tax bill is actually a problem for your retirement plans. If it is manageable, selling outright and reinvesting into public market equities or other liquid assets may be simpler and more flexible than the DST route.
If the tax exposure is genuinely significant and passive real estate still makes sense for your goals, a DST can work. But go in with a clear understanding of the fees, the loss of control, and the due diligence required to find a quality fund.
The goal is not just to avoid taxes. The goal is to make a decision that serves your life in retirement.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on exiting rental properties and navigating real estate tax strategy in retirement, listen to the full podcast episode here.