Delaware Statutory Trust (DST) 1031 Exchange - Costs vs. Capital Gains Taxes

[Kay March]

While considering doing a 1031 exchange into a Delaware Statutory Trust (DST), I read that upfront costs for a DST can range from 10% to 18% of the invested equity. Assuming that no debt is involved, Is paying that cost necessarily better than paying the tax on your long term capital gain in the property? The 10% to 18% cost of the DST would be applied to the entire amount of the investment, whereas the capital gains tax would be applied only to the gain. The 10% to 18% cost of the DST would be repeated every time the DST terminates and a new 1031 exchange must be made into a new DST, maybe every 5 to 8 years, whereas the capital gains tax could be a one time cost. Say you want to do a 1031 exchange of the $300,000 proceeds (no debt) of the sale of a property, and let's say that the $300,000 includes a long term gain of $100,000. How is it better to pay 10% to 18% of $300,000, probably every 5 to 8 years, instead of a 15% or 20% capital gains tax on $100,000 just once?

[Greg Scott]

This is a great example of how trying to avoid taxes can lead to a sub-optimal return.  Most of the tax-avoidance schemes do not beat depreciation available to all real estate investors.