A Delaware Statutory Trust 1031 exchange lets a tired landlord sell a rental, defer the entire capital gain, and end up holding a fractional interest in institutional real estate that requires zero management. It is the third door most accountants never mention — the conversation usually stops at “keep managing it or pay your taxes.”
The catch is how DSTs are normally sold. Commission loads of 6.5% to 8% are typically built into the offering price, and the seller is told not to worry about it because it is “included.” Marc Lescarret, a fee-only advisor at Marc Alan Wealth Management in northern New Jersey, has run this exchange on his own condo and prices it differently for clients.
What follows is the sequence: test whether the asset should be sold at all, understand what a DST interest actually is, price the transaction honestly, look at the leveraged structure that returns cash instead of income, and check what death and basis do to the math before you sign anything.
Key takeaways
- Run the cap rate before you decide anything: a $1M property clearing $20,000 a year after operating expenses is a 2% cap rate, and Lescarret regularly finds 2%-or-less on properties held for decades.
- DST offerings commonly carry 6.5% to 8%+ in commissions buried in the price, so a $1M exchange still shows $1M on the statement — ask for the load in dollars, in writing.
- A highly leveraged non-recourse DST can return roughly 85% of proceeds as cash without triggering tax, but pays no current income while the loan amortizes.
- A 1031 into a DST preserves the step-up in basis for heirs, so exiting management does not have to forfeit the reason families hold decaying rentals.
- Before you exit, review the last few returns: four or five of the landlord returns Lescarret reviewed most recently were missing depreciation while the owner paid roughly 40% all-in on rent income.
From the Real Estate Pros Show
This article draws on an interview with Marc Lescarret of Marc Alan Wealth Management on the Real Estate Pros Show, hosted by Meghan Escobar.
Start With the Cap Rate, Not the Tenant Headache
Run the number before you decide anything about tenants. Take last year’s net operating income — rent minus operating expenses, before any loan payment — and divide it by what the property would sell for today.
Lescarret uses that as his keep-or-sell screen. A $1 million property clearing $20,000 a year after expenses is a 2% cap rate. Treasuries were paying more than double that at the time he was making the comparison, with no roof, no tenant, and no call at 11 p.m. He says 2%-or-less cap rates are common on properties owners have held for 20 or 30 years: rent drifted up slowly, value compounded fast, and nobody re-ran the math against a current sale price.
Two adjustments before you act on the number:
- Use market rent and honest expenses — not the below-market rent a long-term tenant has been paying, and not a maintenance figure that ignores the capital items coming due.
- Tax the income the way it actually gets taxed. Lescarret notes the New Jersey landlords in his practice are running roughly a 40% all-in rate on rent, which turns a 2% pre-tax yield into something closer to 1.2% in your pocket.
The replacement he targets for those owners pays 4%–5%, with a portion of the distribution sheltered. That spread is the argument for selling. Tenant fatigue is only what makes an owner finally look; the cap rate tells you whether looking was justified. If a paid-off rental is throwing 7% on today’s value, the headache is being paid for.
What a Delaware Statutory Trust 1031 Exchange Actually Buys You
A DST interest is a fractional ownership position in a trust that holds real estate, structured to qualify as replacement property in a 1031 exchange. You wire proceeds through a qualified intermediary, take the interest, and the gain stays deferred. You do not manage anything, you do not sign on debt, and you receive distributions rather than rent.
Lescarret did it with his own property. He owned a condo in Parsippany, New Jersey, rented for years. The pipes kept failing — he walked in one day to another leak, fixed it, and it happened again. He sold, 1031’d into one of the offerings he works with, and now holds a 1% interest in self-storage in Gainesville, Florida. His cash flow went up and the management went to zero.
The part investors miss is that this is not necessarily permanent. When the sponsor eventually sells the storage asset, he intends to 1031 the proceeds into a property he manages himself again. Active to passive and back — he is eyeing lake houses he could run as short-term rentals and use personally within the allowed limits.
Two structural points worth being clear-eyed about. You are a minority holder with no control over hold period or sale timing, and the interest is illiquid — there is no listed market for a 1% slice of a storage trust.
Lescarret is direct that he is not a 1031 specialist. He works alongside a qualified intermediary, a CPA and an attorney, and his role is asking the questions the client would not know to ask. Run yours the same way; the exchange has to hit the statutory deadlines to work at all.
In my capacity, I can’t get a commission from anything I get them into, including real estate tax shelters. So I could get somebody a fabulous deal, charge a planning fee, and it’s basically a third or less of what that other guy makes.
— Marc Lescarret, Marc Alan Wealth Management
The Fee Problem: 6.5% to 8% Buried in the Price
The standard DST sale carries a commission of 6.5% or more, and Lescarret has seen 8%-plus. You will not see it on your closing statement. When the seller asks what the fees are, the answer is “don’t worry about it, it’s included in the price” — so a $1 million exchange shows $1 million, and the load comes out of the value of what you now own.
Picture his typical case: a 70-year-old who has owned a rental free and clear for 30 years, selling for $1 million, with no loan to pay off. On an 8% load, roughly $80,000 of that is compensation he was never quoted. He will not feel it until distributions come in lower than the pro forma he was shown.
Lescarret is fee-only, which he says applies to about 2% of advisors. The distinction matters most at exit:
- Fee-only — the advisor takes no commission from any product they place you in, including real estate tax shelters. Compensation is a stated planning fee or a percentage of assets managed, and it does not change based on which structure you choose.
- Fee-based — an hourly or 1% fee, plus commissions on products. As he puts it, if the payout scales with the size of the placement, the incentive is no longer neutral.
His planning fee on a DST exchange runs a third or less of that commission load. On the $1 million example, the client’s position lands closer to $1,065,000 than $1,000,000. Whoever you use, ask one question in writing: what is the total load on this offering, in dollars?
The Leveraged DST That Returns Cash Instead of Income
Some owners hear “passive income product” and want no part of it. They want money in hand. There is a structure for that, and it does not require paying the gain.
Lescarret describes a highly leveraged, non-recourse DST that returns roughly 85% of proceeds to the seller as cash without triggering tax. On a $1 million sale, that is about $850,000 available, versus roughly $600,000 net if a New York City owner simply sold and paid city, state and federal tax. You are left holding a real estate interest that is heavily financed and non-recourse to you personally.
The tradeoff is real and you should price it before you get excited:
- No current cash flow. The retained interest pays you nothing. The property’s income services the debt, so your equity builds only as the loan amortizes.
- Leverage cuts both ways. Heavy debt on the underlying asset means a soft market can wipe out the residual equity, even if the loan is non-recourse to you.
- Illiquidity. You cannot sell the interest to raise cash later. The 85% you took at closing is the liquidity event.
- It has to be structured properly. This is a 1031 with a specific debt-replacement profile. Get it wrong and you have a taxable sale plus fees.
Where it fits: an owner who wants the bulk of the proceeds now, has no need for income from the remaining slice, and intends to leave the residual interest to heirs — who inherit it at stepped-up basis with the loan paid down over the hold.
Death, Basis and Why So Much Rental Stock Sits Dilapidated
Drive any older rental neighborhood and you will see deferred maintenance that makes no economic sense. Lescarret’s explanation: the family is waiting for the owner to die. Heirs receive a stepped-up basis, so the embedded gain disappears at death. Spending money on the building now, or selling and paying a third of the proceeds in tax, both look worse than doing nothing.
That is the real reason the “keep managing or pay taxes” framing traps people. A 1031 into a DST does not forfeit the step-up — the deferred gain rides along with the replacement interest and gets wiped at death the same way the original building would have. The owner stops managing, the family keeps the basis outcome.
The cost of getting it wrong is not theoretical. He worked with a Manhattan owner who sold for $13–14 million and paid roughly $4 million in combined city, state and federal tax.
Titling drives the outcome as much as structure does. He walked into a home where the wife held a large Microsoft position she wanted to trim but could not, because the gain was enormous. Her husband had advanced dementia. The assets were titled in her name — moving them to his side, so she would inherit at stepped-up basis, was worth an estimated $100,000. She had used the same advisor and accountant for a decade and nobody had looked.
Nothing here is tax advice, and the mechanics turn on how title is held and what state you are in. The general lesson holds anyway: before an exit, someone competent should read the deed and the beneficiary designations, not just the P&L.
Before You Exit, Check the Return You Already Filed
Pull the last three years of Schedule E before you list anything. Four or five of the most recent landlord returns Lescarret reviewed were missing depreciation entirely — while the owners were paying roughly 40% all-in on the rent income those returns reported. That is a deduction the owner was entitled to and did not take, year after year.
The second thing to check is the building-to-land allocation. Land is not depreciable, so the split between building value and land value sets the size of your annual deduction. Many preparers default to the local assessor’s ratio because it is fast and defensible. It is often not the best-supported number. Working from realtor and appraisal input, Lescarret pushed a defensible higher building allocation for one client and raised the deduction 20%–30%.
He also draws a line most owners never think to check. In one case a client’s “CPA” defended a missing-depreciation position by claiming they would recover it at sale — which was wrong — and turned out not to be a CPA at all, just an unlicensed tax preparer. Ask for the license.
His method for disagreements is worth copying: he does not argue with the preparer. He forwards the return to a second CPA and lets the professionals resolve it. Confronting the person who signed it invites defensiveness; a second opinion produces an answer.
Fix the return first for a practical reason. Depreciation affects basis, basis affects the gain you are trying to defer, and the numbers you hand to a qualified intermediary need to be right before the exchange clock starts.
Frequently asked questions
Can you 1031 exchange out of a Delaware Statutory Trust back into a property you manage yourself?
Yes — that is the plan Lescarret is running on his own holding. He 1031’d a Parsippany condo into a self-storage DST in Gainesville, Florida, and when the sponsor eventually sells that asset he intends to 1031 the proceeds into a property he manages directly again.
The timing is the constraint: you exchange out when the trust sells, not when you feel like it, and the exchange has to be set up through a qualified intermediary before the sale closes.
How much commission is built into a typical DST offering, and how would I even see it?
Commonly 6.5% or more, and sometimes north of 8%, according to Lescarret. You will not see it, which is the problem — it is priced into the offering, so a $1 million exchange still shows $1 million on the statement and the standard answer to “what are the fees” is that they are included.
Ask for the total load in dollars, in writing, before you commit, and ask the person presenting it whether they are compensated by the sponsor.
What does ‘fee-only fiduciary’ mean and how is it different from a fee-based advisor?
Fee-only means the advisor takes no commission from any product they place you in, including real estate tax shelters — their pay is a stated planning fee or an asset-based fee that does not change with the structure you choose. Lescarret says that applies to roughly 2% of advisors.
Fee-based is different: an hourly or 1% fee plus commissions. If the payout rises with the size of the placement, the recommendation is not neutral, and at exit that difference can be worth tens of thousands of dollars on a single transaction.
Does putting a property into a DST cost my heirs the step-up in basis?
No. The deferred gain carries into the replacement interest, and the step-up applies at death the same way it would have on the original building. That is why Lescarret uses it with owners who are only holding decaying rentals to preserve the step-up for their families.
How it plays out depends on how the interest is titled and on your state, so have the CPA and attorney confirm the specifics before the exchange, not after.
At what cap rate does it stop making sense to keep a paid-off rental?
There is no universal threshold, but Lescarret’s test is straightforward: compare the property’s cap rate to what a bond would pay you with no management. A $1 million property clearing $20,000 a year after operating expenses is at 2%, and he sees that regularly on long-held rentals.
Then adjust for tax. If rent income is taxed at roughly 40% all-in and the alternative pays 4%–5% with part of the distribution sheltered, a low-single-digit cap rate is hard to defend on economics alone.
The bottom line
Before you call a broker or an accountant, do the one thing almost no long-term owner has done: divide last year’s real net operating income by today’s sale price, then pull the last three Schedule Es and check that depreciation was actually taken. Those two numbers determine whether an exit makes sense and what it will cost you — and they need to be right before the exchange clock starts.
