DST Replacement Calculator

A 1031 exchange defers your capital gains tax only if what you buy is at least equal to what you sold. There are three separate things to match, and it is possible to satisfy one while failing another. This calculator checks all three at once and shows the amount still outstanding on each.

In the top row, fill the two yellow boxes: the Equity Invested that came out of the sale and went to your qualified intermediary, and the Total Debt Value of the mortgage that was paid off. The calculator adds them into Total RE Purchased, which is the value of the property you sold. That figure is the total your replacement portfolio has to match.

Use one line per DST. There are five lines to start. The small + property control under the table adds one more line each time you press it, up to two extra. Once you have added a line, a − property control appears next to it to remove it, as long as you have not typed into that line.

You enter four things on each line and the calculator works out the rest:

• Forecast Cash on Cash % — the annual return the DST forecasts.
• Property — the name, for your own reference.
• Equity Invested — how much of your money goes into this one.
• Loan to Value — the debt the DST already carries, as a percentage of the property's value.

Loan to Value is the piece that does the heavy lifting. Put $1,000,000 into a DST at 50% Loan to Value and you have acquired $2,000,000 of real estate, because the DST's own debt supplies the other half. That is how $1,000,000 of equity can acquire $2,000,000 of replacement value, and it is why the debt column fills itself in. Type into the yellow boxes only. Every white and light grey figure is calculated for you.

Underneath the property lines, outside the main table, three summary rows do the checking. Sub-Total adds up what you are buying. Remaining to Replace below it is the row to read: it shows what still has to happen, in three separate columns.

• Equity — the full amount that came out of the sale has to go back into real estate. Anything left over is generally treated as boot and is taxable.
• Total Debt Value — the mortgage you paid off has to be replaced, either by taking on debt through the DSTs or by adding cash of your own.
• Total RE Purchased — the total value you buy has to reach the total value you sold.

A zero in a column means that test is satisfied and nothing more is needed there. A red figure is the amount still outstanding. The row never shows a negative, so any figure in it is an amount still to be replaced.

Underneath the table a short summary gives the overall verdict on the figures you entered. It reads Fully replaced, in green, when all three tests are met, or Partial exchange, taxable boot likely, in red, when any one of them is not. Below the verdict is a line for each of the three tests explaining where it stands.

The upper grey box under the Forecast Cash on Cash % column is your blended yield: the portfolio's total forecast return divided by the equity actually placed in it. It is a weighted average, not a simple one. Each property pulls the blend in proportion to the money behind it, so a large position in a lower-yielding DST outweighs a small position in a higher-yielding one.

An example makes it clearer. Say you have $2,500,000 to place and two DSTs to choose between, one forecasting 5.00% and one forecasting 6.00%. A simple average of those two forecasts is 5.50%, no matter what you do. The blended yield moves with the split:

The simple average sits at 5.50% in all three rows, because it only looks at the two forecast percentages and ignores how much money is behind each. It is right only in the first row, where the split happens to be even. In the other two it overstates the return.

The blended figure follows the money. The equity is the same $2,500,000 in each row, and only the split changes, but as more of it moves into the 5.00% DST the blend falls toward 5.00%. That is what this figure is there to show, as you decide how to split equity between DSTs.

Two things move the blended yield: the forecast percentages you enter, and how you split the equity between them. Debt does not move it. Change a Loan to Value from 0% to 55% and the blended yield does not change at all. Cash on cash measures the return on the cash you put in, and the sponsor's forecast already accounts for whatever debt that DST carries. Loan to Value changes how much real estate your equity buys; it does not change the forecast return on that equity.

A second box appears below the first, in the same Forecast Cash on Cash % column, but only when some of your exchange equity has not been placed.

The first is based on the equity you actually placed. The second is based on the full amount you needed to place. Each box prints the dollar figure it was calculated on, so you can tell them apart.

In a full exchange the two are identical, so only one is shown. When they differ, the gap between them is what the unplaced equity is costing you in yield.

An investor sells for $4,000,000: $2,500,000 of equity to the intermediary and a $1,500,000 mortgage paid off. He puts $1,000,000 into a single DST at 50% Loan to Value forecasting 5%.

That $1,000,000 buys $2,000,000 of real estate and carries $1,000,000 of debt. Against what he sold, he is $1,500,000 short on equity, $500,000 short on debt and $2,000,000 short on value. All three tests fail. The two percentages read 5%, measured on the $1,000,000 he placed, and 2%, measured on the $2,500,000 he needed to place.

Both are correct at the same time. He owns a DST forecasting 5%, and his exchange is earning 2%, because $1,500,000 of his $2,500,000 of equity was never invested. The distance between those two figures is the clearest picture of what a partial exchange costs.