DST Case Study: How a Retiring Couple Converted a 12-Unit Apartment Building Into $7,800/Month in Passive Income

Note: This case study is illustrative and based on composite real-world scenarios. Names and identifying details are fictional. Figures are representative of typical DST transactions and intended for educational purposes only.

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Robert and Linda Marchetti spent 28 years as landlords. What started as a duplex they bought in 1994 grew into a 12-unit apartment building in suburban Phoenix — a property they’d painstakingly managed through tenant turnover, maintenance emergencies, and two market cycles.

By 2024, the building had appreciated dramatically. They’d purchased it for $480,000. A recent appraisal put it at $2.1 million. Their adjusted cost basis — after years of depreciation — was approximately $210,000.

The math was both exciting and alarming.

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The Problem: A Tax Bill That Would Undo Decades of Wealth Building

Robert and Linda wanted to retire. They were both 64. The apartment building was consuming the energy they wanted to spend on grandchildren and travel. They were ready to sell.

But when their CPA ran the numbers, the tax picture was sobering:

Capital gain: $2,100,000 sale price − $210,000 adjusted basis = $1,890,000

Federal tax breakdown:

• Long-term capital gains (20%): $258,600
• Depreciation recapture (25% on ~$200,000 of accumulated depreciation): $50,000
• Net Investment Income Tax (3.8%): $71,820
• Federal total: ~$380,420

Arizona state tax (4.5% on capital gains):

• ~$85,050

Total estimated tax: ~$465,000

That’s nearly half a million dollars to the government — and it would leave them with roughly $1.6 million after tax to generate retirement income. At a 5% yield, that’s about $80,000 per year, or $6,667 per month. Not bad, but a meaningful step down from what they’d been earning from the building.

More importantly, they’d be converting $465,000 from income-generating capital into tax payments — capital that could otherwise be working for them in retirement.

Their CPA and financial advisor recommended they explore a DST 1031 exchange.

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The Solution: A DST 1031 Exchange With Three Diversified Properties

Robert and Linda were introduced to a DST-specialized advisor who walked them through the process. Here’s what their exchange looked like.

Step 1: Setting Up the Qualified Intermediary (QI)

Before signing the final purchase agreement with their buyer, Robert and Linda engaged a Qualified Intermediary. Their exchange began the moment their building closed.

Sale price: $2,100,000 Net proceeds after closing costs and their existing mortgage payoff ($320,000): $1,710,000

Their QI held the $1,710,000 in a segregated escrow account. The clock started: 45 days to identify replacement properties.

Step 2: Identifying Three DSTs

With guidance from their DST advisor, they identified three DST offerings within the 45-day window:

DST #1 — Net-Lease Grocery-Anchored Portfolio

• Underlying property: A portfolio of 6 grocery-anchored shopping centers in suburban Texas and Georgia
• Sponsor: 15-year track record, multiple successful exits
• Investment: $600,000
• Target annual distribution: 5.2% cash-on-cash
• Loan-to-value: 45%
• Projected hold: 7–10 years

DST #2 — Class A Multifamily (Arizona)

• Underlying property: 280-unit Class A apartment community in Scottsdale, AZ
• Sponsor: 12-year track record
• Investment: $700,000
• Target annual distribution: 4.8% cash-on-cash
• Loan-to-value: 55%
• Projected hold: 5–7 years

DST #3 — Medical Office / Net Lease

• Underlying property: A medical office building leased to a regional hospital system on a 12-year NNN lease
• Sponsor: 10-year track record, 3 successful exits
• Investment: $410,000
• Target annual distribution: 5.6% cash-on-cash
• Loan-to-value: 40%
• Projected hold: 8–12 years

Total invested: $1,710,000 — matching their net proceeds exactly (no “boot” and no taxable amount)

Step 3: The Exchange Closes — Zero Tax Due

Robert and Linda completed their exchange within the 180-day window. Their QI directed the full $1,710,000 to the three DSTs.

Federal taxes owed: $0 Arizona state taxes owed: $0 Total 2024 tax bill on this transaction: $0

The ~$465,000 tax bill was deferred entirely.

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The New Reality: Monthly Passive Income

Within 60 days of closing the exchange, Robert and Linda began receiving monthly distributions from all three DSTs:

Investment	Amount	Annual Rate	Monthly Income
Net-Lease Grocery Portfolio	$600,000	5.2%	$2,600
Class A Multifamily (AZ)	$700,000	4.8%	$2,800
Medical Office / NNN	$410,000	5.6%	$1,913
Total	$1,710,000	~5.1% blended	$7,313

Compare this to what they earned from the apartment building: after mortgage payments, property taxes, insurance, maintenance, and vacancy costs, their net operating income was roughly $62,000 per year — $5,167 per month. And that income required their active management.

Their DST income of $7,313 per month is entirely passive — no tenants, no maintenance calls, no lease negotiations, no Friday-evening emergencies. It’s deposited in their bank account monthly.

Note: In the first year, distributions ran slightly higher while the DSTs were in their initial operational period. The $7,800/month referenced in the headline reflects the first 12 months’ actual average, including some distributions from the multifamily DST’s initial lease-up incentive distribution.

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Tax Efficiency of the New Income

Because Robert and Linda are beneficial owners in DSTs, they receive their proportional share of each DST’s depreciation deductions. In their first year of DST ownership:

• Gross DST distributions received: ~$87,756
• Depreciation and pass-through deductions: ~$48,000
• Net taxable DST income reported on their returns: ~$39,756

Their effective income tax on $87,756 in cash received was calculated on only $39,756. The depreciation shield meaningfully improved the after-tax yield on their investment — one of the underappreciated benefits of owning real estate through a DST versus a REIT.

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Estate Planning Integration

Robert and Linda worked with their estate attorney to hold all three DST interests inside their revocable living trust. This means:

• At either spouse’s death, the DST interests pass to the surviving spouse through the trust — without probate
• At the surviving spouse’s death, the interests pass to their children through the trust — again without probate
• If either spouse dies while holding the DST interests, their heirs receive a stepped-up basis — potentially eliminating the $1,890,000 in deferred capital gains entirely

Their estate attorney also documented their community property status in Arizona, which means that if either spouse dies, the full step-up may apply to the combined DST interest — not just half.

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What Happened When the First DST Exited

In late 2030 — six years after the exchange — the Net-Lease Grocery Portfolio sponsor sold the underlying properties. Robert was 70; Linda was 69.

Sale proceeds from their $600,000 interest: $714,000 (a 19% appreciation over 6 years) Deferred gain to roll forward: Original basis carried forward

Their advisor presented three options:

1. Pay the tax — recognize the gain and pay taxes. The deferred gain had grown, but they had more resources than at age 64.
2. Exchange into another DST — continue deferring, continuing their passive income stream.
3. Convert via 721 UPREIT — the sponsor offered a 721 path into a publicly traded REIT’s operating partnership, which would eventually convert to liquid REIT shares.

Robert and Linda chose to do another 1031 exchange into two new DSTs — maintaining their passive income, continuing their tax deferral, and resetting the clock for another 7-10 year hold.

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Key Lessons From This Case Study

Start before you’re ready to sell. Robert and Linda began working with their DST advisor 8 months before listing their building. This gave them time to evaluate multiple DST options, understand the fees and risks, and select investments they genuinely understood — not ones they grabbed in a panic during the 45-day window.

Diversification matters even in DSTs. By spreading their capital across three DSTs (different property types, different geographies, different sponsors), they reduced their exposure to any single property’s performance. When one DST eventually underperformed modestly, the other two compensated.

The income comparison requires honesty. Their net operating income from the apartment building was closer to $5,167/month after expenses — not the gross rent. Comparing gross DST distributions to net landlord income understates the advantage. When they compared apples to apples, DST income was meaningfully higher and required zero of their time.

The tax deferral compounds. The $465,000 that stayed invested (rather than going to taxes) earned 5%+ for the entire holding period. Over 10 years, that “saved” capital generates an additional $23,000+ per year in income — money that would have gone to the IRS instead went into Robert and Linda’s retirement account.

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Is This Strategy Right for You?

Robert and Linda’s situation had several characteristics that made a DST 1031 exchange highly suitable:

• Highly appreciated property with a large embedded gain
• Desire to exit active management entirely
• Qualified as accredited investors
• Horizon of 10+ years before needing to access the invested capital
• Existing estate plan that could accommodate DST ownership

If your situation has significant overlap with this profile, the DST 1031 exchange deserves serious consideration. The best starting point is a conversation with a DST-specialized advisor — and doing that conversation well before you’re ready to sell.