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.
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:
With a small DST completing the exchange:
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.
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:
You are NOT getting:
The "making nothing" refers to the lack of active value creation or capital events—not the absence of returns.
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:
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.
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:
You do:
That's it. You're literally living your life while real estate assets generate income and appreciate in the background.
Using a small DST allocation to complete a 1031 exchange—even if returns are minimal—makes sense when:
If completing the exchange saves you $100,000+ in taxes, a $50,000 allocation earning minimal returns is easily justified.
This strategy works for smaller amounts ($25,000-$200,000). For larger amounts, you'd want better-performing DSTs.
You've identified your primary replacement property (the $2M building). The DST is just mopping up excess equity.
You're approaching the 45-day identification deadline and need to complete the exchange now, even if the available DST options aren't ideal.
Managing one direct property + one DST is simpler than trying to find multiple direct properties to absorb all equity perfectly.
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:
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.
Is it worth investing $100,000 in a DST that might generate minimal returns for 5-7 years?
If it saves you:
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.
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:
The DST investor has truly exited the active real estate business while maintaining real estate exposure, income, and tax benefits.
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:
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