Can You 1031 Exchange Into a Delaware Statutory Trust (DST) in Los Angeles? Complete Guide for California Property Owners
Yes, Los Angeles property owners can absolutely use a 1031 exchange to invest in Delaware Statutory Trusts (DSTs). The IRS recognizes DSTs as qualifying "like-kind" real estate investments under Section 1031, enabling California investors to sell appreciated investment property, defer substantial capital gains taxes, and transition into passive real estate ownership. For LA-area investors facing high property values, complex rent control regulations, and demanding tenant management, DSTs offer a tax-efficient path to institutional-grade real estate portfolios.
What is a Delaware Statutory Trust (DST) for 1031 Exchanges?
A Delaware Statutory Trust is a legal entity that owns and operates commercial real estate properties. Rather than purchasing property directly, investors buy fractional beneficial interests in the trust, gaining exposure to professionally managed assets like Class A multifamily complexes, medical office buildings, industrial warehouses, and retail centers.
DSTs became IRS-approved for 1031 exchanges following Revenue Ruling 2004-86, which established that beneficial interests in certain trusts qualify as "like-kind" property. This ruling opened doors for investors to exchange individual rental properties for shares in diversified, institutional-quality real estate portfolios.
How DST 1031 Exchanges Work: Step-by-Step Process
Phase 1: Property Sale and Exchange Setup
When you sell your Los Angeles investment property, proceeds must be held by a Qualified Intermediary (QI) to maintain tax-deferred status. The QI facilitates the exchange and ensures IRS compliance throughout the process.
Phase 2: 45-Day Identification Period
Within 45 days of closing your original property sale, you must identify potential replacement properties in writing to your QI. DSTs can be included alongside traditional real estate in your identification list, giving you flexibility to compare options.
Phase 3: 180-Day Exchange Completion
You have 180 days total from your original sale to complete the exchange. DST investments typically close faster than traditional real estate purchases, often within 2-3 weeks, providing timing advantages for tight exchange deadlines.
Phase 4: Passive Ownership Begins
Once invested, you begin receiving monthly or quarterly distributions from rental income without day-to-day management responsibilities. The DST sponsor handles all operations, from tenant relations to property maintenance and strategic decision-making.
Why Los Angeles Investors Choose DSTs: Key Benefits
Tax Advantages for California Property Owners
California investors face some of the nation's highest tax burdens, with combined federal and state capital gains rates reaching 37% or higher. A successful DST 1031 exchange defers these taxes indefinitely, preserving capital for continued investment growth.
Real Example: A Beverly Hills investor sold a duplex purchased in 1995 for $400,000, now worth $2.8 million. By exchanging into DSTs, they deferred approximately $650,000 in combined federal and California capital gains taxes while maintaining real estate exposure.
Passive Income Without Management Headaches
Los Angeles rental property ownership involves unique challenges including strict rent control ordinances, tenant protection laws, and high maintenance costs. DSTs eliminate these concerns by transferring all management responsibilities to professional sponsors with institutional resources.
Portfolio Diversification Opportunities
DSTs provide access to property types and geographic markets typically unavailable to individual investors. Instead of owning a single LA duplex, investors can gain exposure to medical office buildings in Texas, industrial facilities in the Southeast, and multifamily properties across growing Sun Belt markets.
Lower Investment Minimums
While purchasing institutional-grade properties directly requires millions in capital, DST investments often begin at $100,000 minimums, making diversified real estate portfolios accessible to more investors.
Estate Planning Benefits
DSTs can provide estate planning advantages through potential step-up in basis for heirs, potentially eliminating deferred capital gains taxes entirely. This benefit is particularly valuable for Los Angeles property owners with highly appreciated assets.
DST Investment Types Popular with LA Investors
Multifamily Apartment Communities
Class A and B+ apartment complexes in growing markets like Austin, Nashville, and Phoenix offer stable cash flow and appreciation potential.
Medical Office Buildings
Triple-net lease medical facilities provide predictable income streams with creditworthy tenants and long-term lease structures.
Industrial and Warehouse Properties
E-commerce growth drives demand for logistics facilities, making industrial DSTs attractive for income and growth potential.
Student Housing
Purpose-built student housing near major universities offers specialized expertise that individual investors rarely possess.
Understanding DST Risks and Limitations
Liquidity Constraints
DSTs are designed as long-term investments, typically holding properties for 5-10 years. Unlike REITs or publicly traded securities, DSTs cannot be easily sold before the sponsor's exit strategy executes.
Limited Investor Control
DST investors are passive beneficiaries with no voting rights or operational control. All decisions regarding property management, financing, and eventual sale rest with the sponsor. This arrangement suits investors seeking passive income but may frustrate those preferring active involvement.
Fee Structures Impact Returns
DST investments include upfront fees (typically 3-7%) plus ongoing asset management fees. While these costs reflect professional management services, they reduce net investor returns compared to direct ownership.
Sponsor Selection Critical
DST performance depends heavily on sponsor track record, market expertise, and asset selection. Investors must thoroughly evaluate sponsor experience, past performance, and alignment of interests before investing.
Financing Limitations
DSTs use non-recourse debt, meaning investors cannot add leverage or modify financing structures. Additionally, if DST debt exceeds an investor's original property debt, they may face taxable "debt relief" income.
Is a DST 1031 Exchange Right for You?
DSTs work particularly well for Los Angeles area investors who:
Own highly appreciated rental properties and face substantial tax consequences upon sale
Seek retirement from active property management while maintaining real estate exposure
Inherit investment property and prefer passive income over hands-on management
Face California regulatory challenges including rent control and tenant protection laws
Want geographic diversification beyond the Los Angeles market
Require exchange timing flexibility due to DST's faster closing processes
Who Should Consider Alternatives
DSTs may not suit investors who:
Prefer maintaining control over investment decisions
Need liquidity and flexibility to exit investments quickly
Want to add personal leverage or modify financing structures
Seek hands-on real estate involvement and management opportunities
DST 1031 Exchange Requirements in California
To qualify for 1031 treatment, your original Los Angeles property must be held for investment or business purposes. Primary residences and properties held primarily for resale don't qualify. Additionally, both your original property value and DST investment must be of equal or greater value to defer all capital gains taxes.
Working with experienced 1031 intermediaries and DST specialists familiar with California regulations ensures compliance with both federal exchange rules and state-specific requirements.
Los Angeles Market Considerations
The Los Angeles real estate market presents unique factors making DSTs particularly attractive. High property values mean substantial capital gains exposure, while complex local regulations create management burdens many investors prefer to avoid. DSTs allow LA investors to maintain real estate exposure while accessing professional management and geographic diversification unavailable through local direct ownership.
Ready to explore whether DST 1031 exchanges align with your Los Angeles investment goals? Professional guidance helps evaluate your specific situation, tax implications, and available DST opportunities to make informed decisions about your real estate investment future.
About the Author
Justin Borges, leader of The Borges Real Estate Team at eXp Realty, is Los Angeles’s go-to realtor for 1031 exchanges and DST investments. With over $200M in sales, Justin helps property owners defer capital gains taxes, identify replacement properties, and transition into passive income strategies with clarity and confidence.
