A 1031 DST exchange offers LA apartment sellers a way to defer capital gains taxes while transitioning to passive real estate ownership. For owners tired of active property management, DST investments through a 1031 exchange provide an attractive exit strategy.
When Active Ownership No Longer Fits Your Life
After years—or decades—of managing your Los Angeles apartment building, you may be ready for a change. The midnight maintenance calls, tenant disputes, and constant oversight have taken their toll. You want out, but the tax bill from selling outright is daunting.
A traditional 1031 exchange lets you defer those taxes, but it requires identifying and purchasing another property within strict timeframes. And that means continuing as an active landlord.
There’s another option that’s gaining popularity: the 1031 DST exchange using a Delaware Statutory Trust (DST) 1031 exchange.
What Is a DST?
A Delaware Statutory Trust is a legal entity that holds title to real estate and allows multiple investors to own fractional interests in institutional-quality properties. When structured properly, DST interests qualify as “like-kind” property for 1031 exchange purposes.
In simple terms: you can sell your apartment building, invest the proceeds into a DST, and defer your capital gains taxes—all while becoming a completely passive investor.
How DST 1031 Exchanges Work
The process follows standard 1031 exchange rules (see IRS Publication 544) with some key differences:
- Sell your property: Close the sale of your LA apartment building
- Engage a Qualified Intermediary: Exchange proceeds go to a QI (never to you directly)
- Identify replacement property: Within 45 days, identify DST investments as your replacement property
- Close on DST interests: Within 180 days, complete your investment into one or more DSTs
- Receive passive income: Collect monthly distributions without management responsibilities
What Types of Properties Do DSTs Own?
DST sponsors typically acquire institutional-quality assets that would be impossible for individual investors to purchase alone:
- Class A apartment communities: 200-500+ unit complexes in growing markets
- Net lease retail: Single-tenant properties leased to national brands (Walgreens, Amazon distribution, etc.)
- Medical office buildings: Healthcare facilities with long-term tenants
- Industrial/logistics: Warehouses and distribution centers
- Senior housing: Assisted living and memory care facilities
These properties are typically professionally managed by national firms, with the DST sponsor handling all investor relations and reporting.
Advantages of DST Investments
1. True Passive Ownership
This is the primary appeal. You own real estate without any management responsibilities. No tenant calls, no maintenance decisions, no bookkeeping. The sponsor handles everything.
2. Tax Deferral
Like a traditional 1031 exchange, you defer capital gains taxes on the sale of your property. This can mean hundreds of thousands of dollars staying invested rather than going to the IRS.
3. Diversification
Instead of all your equity in one LA building, you can spread investments across multiple DSTs in different property types, geographic markets, and sponsors.
4. Access to Institutional Assets
Own a piece of a $100 million apartment community or a Amazon-leased distribution center—properties typically reserved for institutional investors.
5. Flexible Investment Amounts
DST minimums typically start around $100,000, making it easy to match your exact exchange amount without the challenges of finding a single property at your price point.
6. Estate Planning Benefits
DST interests receive a stepped-up basis at death, potentially eliminating deferred gains for your heirs.
Disadvantages and Risks
DSTs aren’t perfect for everyone. Important considerations:
1. Illiquidity
DST investments typically have hold periods of 5-10 years. You cannot easily sell your interest or access your capital before the sponsor sells the underlying property.
2. No Control
You’re a passive investor with no say in property management, capital expenditures, or sale timing. The sponsor makes all decisions.
3. Fees
DST sponsors charge fees for acquisition, management, and disposition. These reduce your overall returns compared to direct ownership.
4. No Additional Financing
Once a DST is formed, it cannot take on new debt. This limits flexibility if the property needs capital improvements.
5. Sponsor Risk
Your investment depends on the sponsor’s competence and integrity. Due diligence on the sponsor is critical.
6. Market Risk
Like all real estate, DST properties can decline in value. There’s no guarantee you’ll receive your principal back.
Who Is a Good Candidate for DST Investments?
DSTs tend to work well for:
- Retiring landlords: Those who want to stop active management but maintain real estate exposure
- Owners seeking simplification: Consolidating multiple properties into passive investments
- Estate planning situations: Positioning assets for stepped-up basis at death
- Time-constrained exchangers: Those who can’t find suitable replacement property within 1031 deadlines
- Diversification seekers: Those wanting exposure to different property types or markets
DSTs may not be ideal for:
- Investors who want control over their properties
- Those who need liquidity or access to capital
- Investors seeking maximum returns (active ownership typically outperforms)
- Those uncomfortable with long hold periods
DST vs. Traditional 1031 Exchange
| Factor | Traditional 1031 | DST 1031 |
|---|---|---|
| Management | Active (you manage or hire PM) | Completely passive |
| Control | Full control | No control |
| Property Selection | You choose | Sponsor’s portfolio |
| Investment Size | Must match exchange amount | Flexible minimums |
| Diversification | Limited (usually one property) | Multiple DSTs possible |
| Liquidity | Can sell when you choose | Locked until sponsor sells |
| Potential Returns | Higher (with more effort) | Lower (but passive) |
Due Diligence: Choosing a DST Sponsor
Not all DST sponsors are created equal. Before investing, evaluate:
- Track record: How have the sponsor’s previous DSTs performed? What were actual returns vs. projections?
- Property quality: Is the underlying real estate institutional quality? Would you want to own it directly?
- Fee structure: What are the total fees? How do they compare to industry norms?
- Debt levels: How much leverage does the DST carry? Higher debt means higher risk.
- Sponsor financial strength: Can the sponsor weather market downturns?
- Exit strategy: What’s the planned hold period? What are the disposition options?
Work with a securities-licensed professional who can help you evaluate DST offerings and ensure they’re appropriate for your situation.
The Bottom Line on 1031 DST Exchanges
DST 1031 exchanges offer a compelling option for Los Angeles apartment owners who want to exit active management while deferring capital gains taxes. The trade-off is clear: you give up control and potential upside in exchange for passive income and simplicity.
For the right investor—particularly those approaching retirement or simply tired of landlording—DSTs can be an elegant solution to the “what’s next?” question that follows selling an apartment building.
If you’re considering selling your LA apartment building and want to explore whether a DST exchange makes sense for your situation, let’s talk. I can connect you with qualified DST specialists and help you understand all your options.
A 1031 DST exchange can be the ideal solution for apartment owners seeking passive income without landlord responsibilities. Contact me to discuss whether a 1031 DST exchange makes sense for your situation.