It’s one of the hardest conversations in the 1031 exchange world. A DST sells below its purchase price. Your client lost real money. And then they find out they still owe taxes — sometimes tens of thousands of dollars.
How is that possible?
The Gap Between Economic Loss and Taxable Gain
When a DST property sells for less than the original purchase price, the investor clearly has an economic loss. They put in more cash than they got back. No one disputes that.
But the IRS doesn’t measure gain the same way your client does. The IRS looks at the adjusted basis — which in a 1031 exchange is typically much lower than the purchase price because of the deferred gain carried forward from the previous property.
So even though the property sold at a loss, the sale price can still be higher than the adjusted basis. That difference is a taxable gain. And depending on the numbers, the tax bill can be significant.
An investor can have an economic loss and still have a taxable gain. That’s the part most people don’t see coming.
It Gets More Complicated
Exchange Planning Corporation reviews exchanges every day. More than half of the exchanges we review contain errors — meaning the basis number your client is working from may not even be correct. If the basis is wrong, the taxable gain is wrong, the boot calculation is wrong, and the entire replacement strategy falls apart.
Before planning next steps on any DST disposition, the first move should always be verifying the basis with an exchange review.
There Are Options — But Timing Matters
When a client faces this situation, they generally have three paths forward: add cash to the next exchange, accept boot and pay the tax, or use a zero-coupon DST to bridge the leverage gap. Each option has different trade-offs depending on the client’s liquidity and goals.
Exchange Planning Corporation is walking through all of this — the numbers, the common mistakes, and the three solutions — in a live webinar on Tuesday, February 11th.
Join Us: DST Sales, High LTV — Now What?
This webinar is built for financial advisors and DST sponsors who need to have this conversation with their clients — or who want to hand it off to an expert.
Exchange Planning Corporation will walk through a real-world scenario step by step, including:
- How a $500K investment can generate a $74K+ tax bill even at a loss
- Why the exit LTV requirement is misunderstood — and how that limits your options
- The three paths forward: add cash, pay boot tax, or use a zero-coupon DST
- Why an exchange review should happen before any planning begins
Can’t make it live? Register anyway and we’ll send the recording.
Exchange Planning Corporation specializes in post-closing 1031 exchange documentation — the critical gap between closing and filing that most of the industry overlooks. We produce the reports your clients’ tax professionals need to properly report their exchanges.
