Why Multifamily Owners Are Turning to DSTs for Their 1031 Replacement Property

For many longtime apartment owners in Los Angeles, the decision to sell isn't really about the market. It's about the work. After decades of tenant calls, rent-control compliance, capital projects, and ever-changing local ordinances, a growing number of owners are ready to step back, but they don't want to hand a large share of their equity to the IRS in the process.

That's why the Delaware Statutory Trust (DST) has become one of the most common conversations we have with sellers. It lets owners complete a 1031 exchange, keep their tax deferral intact, and trade active management for passive ownership. For owners thinking about the next generation, it can also fit neatly into an estate plan.

What Is a DST?

A DST is a legal entity that holds institutional-grade real estate, such as large apartment communities, industrial buildings, medical offices, or net-leased retail. Investors buy fractional beneficial interests, and a professional sponsor handles acquisition, financing, and day-to-day management. The IRS confirmed in Revenue Ruling 2004-86 that Delaware Statutory Trust interests qualify as like-kind property under the 1031 exchange rules. GATP SOLUTIONS

In practical terms, an owner can sell a 20-unit building in Pasadena and exchange into interests in one or several DSTs, deferring capital gains and depreciation recapture, without taking on another property to manage.

Why Owners Are Choosing DSTs

1. Freedom from active management. No more tenant calls, vendor bids, or rent registration deadlines. The sponsor manages the asset, and the investor receives reports and distributions. For owners in their 60s and 70s, this is often the main reason.

2. Protecting the exchange timeline. The 1031 clock is unforgiving. The rules require a 45-day identification window, a 180-day exchange deadline, and a qualified intermediary, and missing any deadline by even one day voids the exchange. DST interests are typically pre-packaged and ready to close, which makes them a strong primary or backup identification when the replacement building search runs tight. TakeHomeTax

3. Matching debt and equity. To defer fully, exchangers generally need to replace both the equity and the debt from the property they sold. Many DSTs carry pre-arranged, non-recourse financing, so an investor can take on a proportional share of debt without personally qualifying for a new loan or signing a guarantee.

4. Diversification. Rather than putting all of their equity into one replacement building, owners can spread proceeds across multiple DSTs by property type, sponsor, and geography. Someone whose whole net worth has been tied to one LA submarket can reduce concentration risk in a single exchange.

5. Access to institutional-quality assets. DST offerings often hold properties most individual investors couldn't buy on their own, with professional asset management and reporting behind them.

Replacement Cash Flow

The natural question from any seller is: "What happens to my income?"

DSTs typically pay distributions monthly from the property's net operating income. Because investors are treated as owning a share of the underlying real estate for tax purposes, they generally receive their share of depreciation as well, which can shelter part of those distributions from current income tax.

A few points to keep in mind when comparing income:

• Compare net to net. A seller's current building may show a strong cap rate on paper, but after vacancies, repairs, management time, and capital reserves, the true take-home number is often lower. DST distributions come after sponsor-level expenses and reserves, so the comparison should be apples to apples.

• Distributions are not guaranteed. They depend on property performance, and sponsors can reduce or suspend them.

• Fees matter. DST offerings carry upfront load and ongoing sponsor fees that affect net returns. These should be reviewed in the private placement memorandum.

• Plan for the exit. Most DSTs hold for several years (often 5 to 10) before the sponsor sells. At that point, investors can exchange again into another property or DST, or cash out and pay the deferred tax.
  

Compatibility with Estate Planning

This is where DSTs are especially appealing for multifamily owners with long holding periods and large deferred gains.

The step-up in basis. Under current law, when an owner passes away, heirs generally inherit the property at its fair market value on the date of death. The cumulative deferred gain accumulated through one or more 1031 exchanges is eliminated. This "swap till you drop" approach turns deferral into potential elimination, and DST interests qualify just like direct real estate. Investment Grade

A larger estate tax exemption. The 2025 federal tax law strengthened this strategy. The federal estate tax exemption was raised to $15 million per person ($30 million for married couples), permanently indexed for inflation starting 2027. Section 1031 also survived fully intact, with no cap, no income limit, no holding-period extension, and the same 45-day and 180-day rules. Investment GradeInvestment Grade

Easier to divide among heirs. Splitting a single apartment building among three children often leads to disagreements, forced sales, or siblings who don't want to be landlords together. DST interests are fractional by design, so they can be divided among beneficiaries in whatever proportions the estate plan calls for. Each heir then decides independently whether to hold, sell at the end of the offering, or exchange again.

No management burden passed down. Heirs inherit an income stream, not a property to operate. For families where the next generation lives out of state or has no interest in being a landlord, that simplicity has real value.

Works with trusts. DST interests can generally be held in a living trust, which can help with probate avoidance and continuity. Owners should confirm structure and titling with their estate attorney.

Important Considerations

DSTs aren't the right fit for everyone. Before deciding, owners should understand:

• Limited liquidity. There's no reliable secondary market, so plan on holding until the sponsor sells.
  

• No control. Investors can't make decisions about the property, refinancing, or timing of sale. IRS rules sharply limit what the trustee can do once the offering closes.
  

• Accreditation. Most DST offerings are available only to accredited investors.
  

• Securities, not real estate. DST interests are sold as securities through licensed representatives, and each offering should be carefully reviewed for sponsor track record, leverage, fees, and business plan.
  

• California reporting. California taxpayers who exchange into out-of-state property still have annual FTB reporting obligations tied to the deferred California gain.
  

The Bottom Line

For multifamily owners ready to step away from active management, a DST can preserve tax deferral, provide passive monthly income, and set up a cleaner transfer to the next generation. The key is to start planning before the sale, so the exchange timeline, replacement income, and estate plan all work together.

If you're considering selling your building and want to explore your options, we're happy to walk through the numbers with you and coordinate with your CPA, estate attorney, and a securities professional.

This article is for informational purposes only and does not constitute tax, legal, or investment advice. DST investments involve risk, including possible loss of principal. Consult qualified tax, legal, and financial professionals before making any investment decision.