Janet's Dilemma: Pay $732,000 in Tax, or 1031 Exchange Into DSTs?

Quick Answer: Janet was selling the property her father built for her family more than 50 years ago, and simply paying the tax would have cost her about $732,000. Working with Exchange Planning Corporation’s calculators, she compared seven different portfolios side by side — paying the tax, buying her own rentals, commercial property, a 721/UPREIT DST, and multi-family DSTs. The clear standout was a multi-family DST portfolio, which the calculators projected would give her roughly 68% more spendable income than her current property, with no tax due at the time of the exchange. Exchange Planning Corporation stayed neutral throughout: the goal wasn’t to steer Janet, it was to make sure she understood the consequences of each choice before she made it.

Janet is selling the property her father built for her and her siblings more than 50 years ago. For most real estate investors, a sale like this is one of the biggest financial decisions they’ll ever make — and Janet had a lot of ideas about how to protect her family’s legacy.

Janet already has a financial advisor in her corner, but it was her accommodator — her Qualified Intermediary — who suggested she get a clearer read on the tax side before committing to anything. That’s where Exchange Planning Corporation’s calculators came in. Worth saying up front: a few of Janet’s options didn’t really require a calculator at all. What she needed in those moments was simply someone to help her think them through. The calculators show tax consequences — but they also build the kind of clarity that helps an investor actually decide. Here’s how Exchange Planning Corporation’s exchange-planning calculators helped Janet weigh each path.

What happens if you just pay the tax instead of exchanging?

This was Janet’s baseline, and the number got her attention. The calculators showed that if she sold the property without completing a 1031 exchange, she would owe about $732,000 in tax. For a property with decades of appreciation and very little basis left, that’s the cost of doing nothing — and it became the figure every other option got measured against. (For a similar breakdown, see how one investor compared a $650,000 tax bill against an exchange.)

Can you do a 1031 exchange and later move into the property?

One idea was to take roughly two-thirds of the proceeds and buy a house that might eventually become Janet’s residence. The catch: to qualify for a 1031 exchange, a replacement property has to be acquired for business or investment use. If Janet decided to make it her home down the road, that’s generally acceptable — but it has to start as an investment property and be held that way. As we talked it through, Janet realized two things: buying a large personal residence would seriously cut into her cash flow, and she had no real idea when or where she’d want to move. Seeing it on paper made an emotional decision easier to set aside.

Should you buy your own rentals or exchange into DSTs?

Janet’s next thought was to put about half the proceeds into two or three rental properties — using a loan for roughly 50% of the cost — and the rest into DSTs. The problem is location-specific: four-plexes and similar small multifamily in California don’t cash flow well, especially carrying a 50% loan. When we ran it, the calculators showed Janet would end up with about $50,000 less in annual income than her stronger options. The leverage she’d be taking on personally was working against her, not for her.

Does higher cash flow from commercial property mean more after-tax income?

Janet also considered commercial property for its stronger cash flow. On paper, the commercial option threw off about 33% more cash flow than comparable residential. But cash flow isn’t the same as after-tax income — and because Janet sits in a high tax bracket, the commercial route actually left her with roughly 4% less after-tax income than residential DSTs. It would also generate about $13,000 in taxes per year, versus no tax for at least five years after the exchange in the residential DST scenario. This is exactly the kind of trade-off that stays invisible until you put the numbers side by side.

What about a DST that can convert to a 721 (UPREIT) later?

Another option was placing some money in a DST structured to roll into a 721/UPREIT later, which can offer a future path to liquidity. A 721 structure is genuinely the right fit for some investors — but it carries a permanent trade-off: once the property converts, the tax basis locks in. That makes it a step to take deliberately, and only after working through it with a specialist. In Janet’s case, liquidity simply wasn’t a concern; she already holds plenty of liquid assets. In our experience, the odds that an investor in Janet’s position ever needs to cash out early are something like 500 to 1. For her, the added complexity didn’t earn its keep.

How much spendable income can a DST portfolio actually replace?

Janet’s underlying goal was to protect the income she relies on. Today she receives $160,000 a year from the family property. We haven’t reviewed her tax returns, but based on the calculator inputs, she’s paying roughly $60,000 a year in tax on that income, and the property manager sets aside another $20,000 for reserves. After taxes and reserves, Janet actually has about $80,000 to spend.

We ran seven different portfolios for her. Only one performed as poorly as her current property — the scenario where she put half the money into California residential — and even that one landed at roughly her current income. The standout was a multi-family DST portfolio held with debt: the calculators projected about 68% more spendable income than she has today. The key distinction is who holds the leverage. In the DST scenario, the trust holds the debt on the investors’ behalf — so Janet gets the benefit of debt-enhanced depreciation and institutional scale without personally signing for a loan or managing a single tenant.

What does Exchange Planning Corporation actually do here?

This is the part worth being clear about: at Exchange Planning Corporation, we’re agnostic. We don’t care which option Janet chooses — we care that she understands the consequences of each one before she chooses it. We don’t manage assets, sell products, or earn commissions, so we have no stake in the outcome beyond getting the analysis right. Janet weighed a couple of other ideas too, like taking cash out or buying DSTs without debt, but the scenarios above were the ones that shaped her thinking.

If you’re facing a decision like Janet’s, schedule a consultation and we’ll help you see your own numbers the same way. And if you’re a financial advisor, Qualified Intermediary, or DST sponsor, the same calculators are free for you at 1031TaxHub.com — so you can give your clients this kind of clarity yourself.

The figures in this article are illustrative estimates generated by Exchange Planning Corporation’s calculators based on the information Janet provided. Individual results vary, some observations here are specific to California, and this article is not tax or investment advice. Consult Exchange Planning Corporation and your own tax professional about your specific situation.

Frequently Asked Questions

How much tax do you pay if you sell investment property without a 1031 exchange?

It depends on your gain, your remaining basis, and your tax bracket, but it can be substantial. In Janet’s case, the estimated tax from selling without an exchange was about $732,000. A 1031 exchange let her defer that while reinvesting the full proceeds.

Is cash flow the same as after-tax income in a 1031 exchange?

No. A property can produce higher cash flow and still leave you with less money after taxes. For Janet, a commercial option generated about 33% more cash flow than residential but produced roughly 4% less after-tax income because of her tax bracket — which is why comparing after-tax results matters more than headline cash flow.

Can you do a 1031 exchange into a property and later make it your home?

A 1031 replacement property must be acquired for business or investment use. Converting it to a personal residence later is generally possible, but it has to start as an investment property and be held that way. Exchange Planning Corporation can help you structure this correctly.

What is a 721 (UPREIT) DST, and who is it for?

It’s a DST structured to roll into an UPREIT, which can provide a future path to liquidity. It suits some investors, but the tax basis locks permanently at conversion, so it’s a decision to make carefully with a specialist. For an investor like Janet who already has ample liquidity, it often isn’t necessary.

How much income can a 1031 exchange into DSTs replace?

It varies by portfolio. When Exchange Planning Corporation ran seven scenarios for Janet, a multi-family DST portfolio held with debt projected about 68% more spendable income than her current property — with no tax due at the time of the exchange. These are illustrative estimates, and results depend on your specific situation.