How DSTs Help Defer Capital Gains and Depreciation Recapture

If you’ve owned investment real estate for years, you may be sitting on substantial appreciation. While that value growth is exciting, selling your property often leads to hefty tax bills due to capital gains taxes and depreciation recapture. These tax obligations can leave property owners torn between the desire to unlock their equity and the fear of triggering significant financial setbacks.

But here’s some good news. A smart solution exists that can allow you to defer taxes, preserve your wealth, and even plan better for your estate. Enter the Delaware Statutory Trust (DST).

Understanding the Tax Burden of Selling Real Estate

Selling investment property can come with intimidating tax implications, including two major categories that can take a significant chunk of your gains:

1. Capital Gains Tax

The IRS imposes capital gains taxes of up to 20% (plus state taxes), assessed on the appreciation your property has gained over its ownership period.

2. Depreciation Recapture Tax

Over the years, you might have taken depreciation deductions to lower your taxable income. When you sell, the IRS requires you to "recapture" those benefits, taxing them at a rate of up to 25%.

For example, imagine you sell a $2 million property. Between the appreciated value and depreciation recapture, you could face a tax bill exceeding $500,000. That’s half a million dollars you could otherwise reinvest or use to generate passive income.

What Is a DST and How Can It Help?

A Delaware Statutory Trust (DST) is a powerful tax-deferral vehicle that property owners can use as part of a 1031 exchange. Recognized by the IRS, a DST allows you to reinvest sales proceeds from your property into fractional ownership of professionally managed, income-generating real estate.

Here’s how it works in simple terms:

1. Sell your current property.

2. Transfer your equity into a DST, rather than purchasing a new property outright.

3. Defer both capital gains taxes and depreciation recapture taxes at the time of exchange.

What’s more, 100% of your equity stays invested and continues working for you, generating regular income without you having to deal with tenants, property maintenance, or loan qualifications.

Breaking Down Depreciation Recapture

What Is Depreciation Recapture?

Depreciation is a tax break property owners take during ownership to lower taxable income. However, when you sell, the IRS taxes the total depreciation you've used over the years.

Example:

Suppose you’ve claimed $400,000 in depreciation deductions. Upon sale, you’ll owe 25% of that amount as a tax bill—that’s $100,000 right off the top!

When you exchange your property into a DST through a 1031 exchange, you defer this recapture tax. Even better, if your heirs inherit the DST investment, they receive a step-up in basis, potentially eliminating these taxes altogether.

What Types of Property Qualify for a DST Exchange?

One of the greatest advantages of a DST is its flexibility. Nearly all types of real estate qualify as “like-kind” property in a 1031 exchange. You can replace properties such as:

• Residential rentals

• Commercial buildings

• Retail spaces

• Industrial or land parcels

Additionally, since DSTs are fractional ownership structures, your equity gets diversified across multiple institutional-grade properties managed by professionals. This eliminates the need to loan qualify or handle tenant demands, giving you far greater peace of mind.

Why Owners Trust Medalist DST Solutions

At Medalist Diversified REIT, we specialize in simplifying the DST process for property owners seeking tax deferral and passive income opportunities. We’ve designed our platform with unique advantages for our clients, including:

• Fully Passive Income

Say goodbye to landlords' headaches. Enjoy income without worrying about tenants, maintenance, or property management.

• 5%+ Targeted Income

Our single-tenant net lease (STNL) properties aim to deliver stable, predictable returns.

• 721 UPREIT Conversion Option

For long-term estate clarity, convert the DST into shares of our REIT without incurring taxes, ensuring liquidity and simplified succession planning.

• Transparent, Low Fees

With Medalist, we prioritize keeping your money working for you, minimizing fees wherever possible.

DSTs Defer Taxes and Transform Wealth Strategy

It’s important to remember that DSTs don’t erase taxes. Instead, they provide you with more control over your financial timeline by deferring these obligations. Here’s how DSTs protect your wealth while creating more opportunities for you and your family:

• Reinvest Your Full Equity

Instead of losing a large percentage to taxes, you can keep all your equity earning passive income.

• Simplify Estate Planning

DSTs simplify succession planning, enabling heirs to inherit investments with a step-up in basis.

• Gain Time to Plan Strategically

Use your tax-deferred capital to strategize for retirement, diversify holdings, or prepare for a family transition.

• Optional Liquidity

A 721 UPREIT conversion can turn your DST investment into liquid shares of a REIT without triggering taxes, giving you increased financial flexibility.

Secure Your Wealth and Plan for the Future

A Delaware Statutory Trust offers more than just tax deferral. It provides a strategic path to preserving and growing your wealth. Whether you're seeking to avoid a massive tax bill, diversify your real estate holdings, or prepare for estate planning, a DST can make the process seamless and effective.

If you’re considering selling property or currently facing a challenging tax situation, act now. Remember, your DST must be set up before closing your sale for it to qualify under IRS guidelines.

📞 Schedule a consultation with a Medalist REIT expert today to explore how a DST can unlock tax advantages, passive income, and lasting financial clarity for your future. solutions@medalistreit.com