Executive Summary

In early 2025 a Colorado couple in their early 60s converted a long‑held duplex via a 1031 exchange into five Delaware Statutory Trust (DST) interests. By June 2026 they completed $100,000 of staged Roth conversions funded largely from DST distributions, trimmed active landlord time to near zero, and stabilized retirement cash flow. The move preserved tax‑deferred treatment on sale proceeds, improved tax diversification, and created a clearer window to manage future Required Minimum Distributions (RMDs) under current law.

Background

“Mark” (63) and “Elena” (62) accumulated retirement capital through steady saving and one local rental duplex. Key balances and property history entering 2025:

  • Original duplex purchase (2002): $240,000; sale price (Mar 2025): $815,000.
  • Retirement accounts circa 2024: Mark’s 401(k) ≈ $910,000; Elena’s traditional IRA ≈ $420,000; Roth IRA ≈ $110,000.
  • Pension income expected at 65: about $10,800/year.

The duplex produced reliable nominal cash flow but created concentration and operational drag. The couple wanted to reduce hands‑on work, smooth retirement income, and create room to convert tax‑deferred dollars to Roth while their reported taxable income remained relatively low.

Challenge

Three interlinked problems required a coordinated solution:

  • Operational burden: Mark was spending roughly 8–12 hours/month on tenant and maintenance issues; they wanted to reclaim that time for family and consulting work.
  • Tax timing risk: Selling outright would trigger capital gains and depreciation recapture; a 1031 exchange could defer those taxes but changes to replacement property and sponsor terms can affect long‑term outcomes.
  • Retirement sequencing: Large tax‑deferred balances meant looming RMDs (RMD age is 73 through 2032 under SECURE 2.0); unmanaged RMDs can push taxpayers into higher brackets, increase taxable Social Security, and raise Medicare IRMAA premiums.

Solution

Their advisor team (CPA, CFP, and Qualified Intermediary) implemented a two‑part plan:

  1. 1031 exchange into diversified DSTs: Defer capital gains by exchanging into professionally managed DST interests, spread across property types and geographies to reduce market concentration and eliminate day‑to‑day landlord duties.
  2. Sequence income and tax conversions: Use predictable DST distributions and limited traditional account withdrawals to fund staged Roth conversions before RMDs begin, while delaying Social Security to age 70 to optimize lifetime benefit and taxation windows.

Why this still matters in mid‑2026: the RMD age remains 73 through 2032 under current law, making the years just before age 73 a valuable conversion window. Additionally, many DST sponsors in 2024–26 structured offerings with higher leverage or short‑term resets—so underwriting debt terms matters more than ever.

Why a DST matched their objectives

DSTs satisfied three priorities: (1) replace an active, single‑asset rental with passive, institutional real estate exposure; (2) provide diversified property and sponsor exposure; and (3) produce regular distributions to support living expenses and conversion funding. Tradeoffs included illiquidity, sponsor control, and layered fees—risks the couple accepted after targeted due diligence.

Implementation

Step 1 (Aug–Dec 2024): Cash‑flow normalization and decision metrics

They modeled conservative, retirement‑grade cash flows to compare options:

  • Gross rent: ≈ $4,450/month.
  • Operating & capital reserves: ≈ $1,550/month normalized.
  • Conservative net: ≈ $27,000/year after higher vacancy and capex assumptions.

Decision rule: if passive replacement could produce similar or modestly higher net cash flow while eliminating management time, it would be worthwhile given the couple’s time and tax goals.

Step 2 (Jan–Mar 2025): Execute the 1031 exchange

The duplex closed March 2025. They engaged a Qualified Intermediary (QI) before listing and followed 45/180 identification and exchange rules. Transaction snapshot:

  • Sale price: $815,000
  • Mortgage payoff: $118,000
  • Commissions & closing costs: ≈ $49,000
  • Net exchange proceeds to QI: ≈ $648,000

Proceeds were allocated across five DST offerings—industrial, multifamily, and necessity retail—with different sponsors and regions to reduce single‑market exposure. They prioritized sponsors with transparent debt schedules and standing reserve policies.

Step 3 (Apr 2025–Jun 2026): Use distributions to enable tax moves

The DST portfolio targeted distributions near 5.1% when purchased. Through March 2026 the holdings produced an annualized 5.2%; by June 2026 distributions trimmed to an annualized ≈5.0% (about $32,400 on $648,000) after one sponsor modestly reduced payout while retaining principal balance. Practical outcomes:

  • Landlord responsibilities fell to nearly zero; the couple now reviews quarterly sponsor reports rather than handling repairs.
  • They completed $100,000 of Roth conversions across 2025–2026 (initial $45,000 in 2025; $55,000 across 2026 finished by June), timed to keep each year’s conversion within targeted marginal brackets. Distributions plus modest IRA withdrawals funded living needs without spiking taxable income.
  • The couple delayed Social Security to age 70, giving them an income cushion later while using DST cash flow for immediate needs and conversions.

Results (Measured through June 2026)

1) Time and operational relief

  • Reported landlord hours fell from ~8–12 hours/month to near‑zero; management tasks reduced to reviewing quarterly DST reports and annual K‑1s or 1099s.
  • Quality‑of‑life improvements were material—Mark reduced consulting hours and they reported lower stress handling repairs and tenants.

2) Cash flow and predictability

  • Pre‑exchange normalized duplex net: ≈ $27,000/year.
  • Post‑exchange DST distributions (annualized to Jun 2026): ≈ $32,400/year—roughly $5,400 higher on paper, with reduced local vacancy risk due to geographic diversification.

3) Tax planning runway

Completed conversions of $100,000 lowered their combined tax‑deferred balance dollar‑for‑dollar. Practically this reduces the base that will generate future RMDs and creates greater flexibility to manage bracket exposure at age 73. Their advisors projected that, all else equal, each $100,000 moved to Roth reduces future required withdrawals by the same amount and therefore the taxable RMDs in later years.

4) Estate simplification and tax diversification

  • Heirs will inherit fractional DST interests and Roth assets rather than managing a single local rental—simpler for out‑of‑state children.
  • Tax diversification improved: more Roth (tax‑free qualified distributions) balanced with professionally managed real estate exposure.

Lessons Learned

1) Match asset form to life stage

An active rental can be a wealth‑building engine in accumulation years but a liability in retirement. Converting to passive institutional exposure preserved real estate allocation while buying back time and creating clearer cash‑flow predictability.

2) Underwrite sponsor debt and distribution sustainability

Since 2024 many DST sponsors issued offerings with higher leverage or short‑term interest resets. Effective due diligence focuses on property‑level debt schedules, interest‑rate reset mechanics, reserve funding, sponsor track record through cycles, and explicit distribution waterfall language. Stress‑test distributions at +200–300 basis points of financing cost to see how payouts hold up.

3) Use non‑IRA cash flow to create Roth conversion windows

DST distributions (non‑retirement cash) let you fund living expenses while converting tax‑deferred dollars to Roth in low‑income years. That sequencing reduces later RMD pressure and the risk of bumping into higher tax brackets, Social Security taxation, and IRMAA surcharges.

4) Liquidity planning remains essential

DSTs are illiquid. Have 2–4 years of liquid reserves for near‑term needs and conversion plans in case sponsor distributions are trimmed or a sale postpones expected liquidity events.

Takeaways

  • Downsizing active rentals into DSTs can convert hands‑on work into predictable cash flow useful for Roth conversions and delaying Social Security.
  • Each dollar converted to Roth reduces future RMDs dollar‑for‑dollar; use non‑IRA cash flow to avoid spiking taxable income while converting.
  • Underwrite DST debt, fee layers, sponsor track record, and reserve policies—interest‑rate sensitivity is a leading risk in 2026.
  • Maintain liquid reserves and an estate plan: passive ownership simplifies heirs’ duties but does not eliminate sponsor or structural risk.
  • Coordinate conversions with Social Security claiming and Medicare IRMAA exposure to optimize long‑term after‑tax retirement income.

FAQ

Are 1031 exchanges into DSTs still allowed in June 2026?

Yes. As of June 2026 the IRS continues to allow like‑kind exchanges for real property and qualified DST interests can satisfy replacement‑property rules. That said, mechanics remain exacting—use a vetted Qualified Intermediary and confirm exchange timelines and entity documentation before closing.

Will DST distributions affect my RMDs?

No—RMDs are calculated from the year‑end value of tax‑deferred accounts (IRAs/401(k)s). However, steady non‑retirement cash flow from DSTs can reduce the need to withdraw from tax‑deferred accounts today and thereby create room to execute Roth conversions that lower future RMD bases.

How should I underwrite interest‑rate and recession risk in a DST?

Prioritize property‑level debt disclosure and stress tests. Model distribution stress scenarios that include higher vacancy, +200–300 basis point increases in property financing costs, and an extended hold period. Review sponsor reserve policies, disposition timelines, and whether debt is fixed, floating, or has near‑term resets.

When should I claim Social Security if I’m doing Roth conversions?

Delaying Social Security to age 70 generally increases your monthly benefit (about an 8% annual credit after full retirement age) and can be valuable if you have other cash flow. Coordinate claiming so that Social Security income does not push you into a higher tax bracket during years when you’re executing sizable Roth conversions.

Is a DST a better alternative than hiring a property manager?

Not always. Property management preserves direct ownership control and potential liquidity at sale. DSTs remove control and add sponsor and structure risks in exchange for diversification and true passivity. The correct choice depends on your priorities: control and potential upside versus time‑freedom and simplified cash flow planning.

Disclosure: This case study is educational and not individualized tax, legal, or investment advice. 1031 exchanges, DSTs, and Roth conversions involve complex rules and risks—consult a Qualified Intermediary, CPA/EA, and a fiduciary financial planner before acting.