Worth Not Making Anything: When Saving Taxes Beats Earning Returns

At our December DIG Philly meeting, Fred Hubler described a counterintuitive strategy: using a small DST allocation that might not generate significant returns, simply to keep an entire 1031 exchange tax-free. "This keeps the whole thing tax-free. So in his case it saves him hundreds of thousands of dollars in taxes. That's worth not making anything for 5 to 7 years."

This reveals a fundamental insight: sometimes preventing a loss is more valuable than generating a gain.

The Small Allocation That Saves Everything

Here's the scenario Fred is describing:

An investor is doing a 1031 exchange. They've identified most of their replacement property—maybe a $2 million building that absorbs most of their equity. But there's a small amount left over—perhaps $100,000 or $150,000—that they can't fit into that direct property purchase.

Without completing the exchange:

• $100,000 of unreinvested equity becomes taxable "boot"
• Taxes on that $100,000: potentially $30,000-$40,000
• But worse: the entire exchange might be questioned by IRS
• The full $2 million property purchase loses some 1031 benefits

With a small DST completing the exchange:

• $100,000 invested in a DST that may generate minimal returns
• Entire $2.1 million exchange remains fully tax-deferred
• Hundreds of thousands in taxes avoided

Even if that $100,000 DST generates zero return for 5-7 years, it's worth it because it preserved tax-free status on the entire transaction.

What "Not Making Anything" Actually Means

The conversation clarifies an important distinction:

"When you say that's worth not making anything over time, what you mean is you're not—you're getting cash flow on the ones that have cash flow but you're not taking out equity or refinancing. There's no capital events."

This is critical: "not making anything" doesn't mean zero cash flow or zero returns. It means:

You ARE getting:

• Regular distributions (passive income)
• Property appreciation over time
• Tax deferral benefits
• Depreciation pass-through

You are NOT getting:

• Ability to refinance and pull out equity
• Capital events or liquidity
• Control over when to sell
• Active management opportunities to force appreciation

The "making nothing" refers to the lack of active value creation or capital events—not the absence of returns.

"All of These Go Up Over Time"

Fred adds: "All of these go up over time because of what type of real estate they are."

This addresses the hidden value in that "zero return" DST allocation:

Real estate fundamentals still work:

• Properties appreciate with market
• Inflation increases asset values
• Rents typically rise over time
• Net operating income grows

So even a DST that's generating minimal cash flow distributions is likely appreciating in value. When it eventually sells in 5-7 years, that $100,000 investment might be worth $125,000-$140,000.

You're not "making nothing." You're making appreciation—but you can't access it until the property sells, which is fine because you didn't need to access it. You needed it to complete your 1031 exchange.

True Passive: "As Passive as We Could Understand Passive to Be"

The conversation ends with this observation: "You're living and you went as passive as I think we all could understand passive to be within real estate."

This defines what truly passive investing looks like:

You don't:

• Manage tenants
• Coordinate repairs
• Make operational decisions
• Handle emergencies
• Deal with contractors
• Review financials constantly
• Refinance properties
• Time the market for sales

You do:

• Receive quarterly distribution checks
• Get annual tax documents (K-1s)
• Wait for properties to sell
• Make 1031 exchange decisions when they do

That's it. You're literally living your life while real estate assets generate income and appreciate in the background.

When This Strategy Makes Sense

Using a small DST allocation to complete a 1031 exchange—even if returns are minimal—makes sense when:

1. Tax Savings Are Substantial

If completing the exchange saves you $100,000+ in taxes, a $50,000 allocation earning minimal returns is easily justified.

2. The Leftover Equity is Modest

This strategy works for smaller amounts ($25,000-$200,000). For larger amounts, you'd want better-performing DSTs.

3. You Have a Main Property Already

You've identified your primary replacement property (the $2M building). The DST is just mopping up excess equity.

4. Time is Short

You're approaching the 45-day identification deadline and need to complete the exchange now, even if the available DST options aren't ideal.

5. Simplicity Matters

Managing one direct property + one DST is simpler than trying to find multiple direct properties to absorb all equity perfectly.

The Opportunity Cost Consideration

Some might argue: "But I could have taken that $100,000, paid the taxes, and invested the remaining $65,000 in something better!"

Maybe. But consider:

What you'd need to beat the DST:The $65,000 (after taxes) would need to significantly outperform the $100,000 DST (tax-deferred) to come out ahead.

Plus you've lost:

• Tax deferral on the main property
• 1031 exchange benefits
• Future step-up in basis benefits
• Ability to continue the exchange chain

The DST earning "nothing" (but really earning 3-5% plus appreciation) while preserving all tax benefits is actually quite hard to beat with after-tax alternatives.

The "Worth It" Calculation

Is it worth investing $100,000 in a DST that might generate minimal returns for 5-7 years?

If it saves you:

• $200,000 in immediate taxes
• Tax-deferred status on entire $2M+ exchange
• Ability to continue 1031 chain indefinitely
• Peace of mind that exchange was completed properly
• Zero time or stress managing properties

Then yes. Absolutely yes.

You're not paying $100,000 for zero return. You're paying $100,000 for $200,000+ in tax savings plus complete passivity.

That's a 100%+ return, realized immediately through tax avoidance, plus ongoing income and appreciation as a bonus.

What "Living and Passive" Really Means

The conversation's conclusion perfectly captures the end state:

You're living your life. The real estate exists in the background. Checks arrive quarterly. You don't think about it much. When properties sell in 5-7 years, you decide whether to continue the 1031 chain or cash out.

Compare this to active real estate investing:

• Constant awareness of properties
• Regular time investment
• Ongoing decision-making
• Emergency problem-solving
• Significant mental bandwidth consumed

The DST investor has truly exited the active real estate business while maintaining real estate exposure, income, and tax benefits.

The Bottom Line

Sometimes the best investment is the one that "makes nothing" because it prevents something worse—losing hundreds of thousands to taxes.

When completing a 1031 exchange, a small DST allocation that earns minimal returns can be worth it if it:

• Keeps entire exchange tax-free
• Saves six figures in immediate taxes
• Preserves future tax deferral options
• Requires zero time or attention
• Lets you live "as passive as possible"

You're not really making nothing. You're making tax savings that are immediate and certain, plus passive income and appreciation that accumulate quietly in the background.

And you're buying something money usually can't buy: complete freedom from real estate management while maintaining real estate exposure.

For investors transitioning to retirement who want to "live and go as passive as possible," a DST that requires nothing from you while preserving tax benefits isn't making nothing.

It's making peace of mind.

And peace of mind, for many investors, is priceless.

Delaware Statutory Trusts require accredited investor status and have minimum investment thresholds. Returns vary significantly and are not guaranteed. Tax benefits depend on individual circumstances and proper 1031 exchange execution. This article is for educational purposes only. Always consult with qualified tax, legal, and financial professionals before making investment decisions.

Image by Steve Buissinne from Pixabay