Passive Real Estate Investing with a 1031 Exchange: Active vs DST Strategies

Yes, you can use a 1031 exchange to step back from being a landlord without paying tax on the sale. You can exchange a property you manage yourself into one that needs less of your time, or into a Delaware Statutory Trust (DST) where someone else manages it entirely.

When active ownership starts to wear

Many investors reach a point where tenant calls, repairs and turnover aren't worth it anymore. Selling outright can mean a large tax bill, especially on a property owned for years with a lot of depreciation taken. An exchange lets you change what you own while deferring that tax.

Options with less management

There's a range between fully hands-on and fully passive:

• Professionally managed property. Keep owning directly, but buy something large enough that hiring a property manager makes sense.

• Net-leased commercial property. With a net lease, the tenant typically pays taxes, insurance and maintenance. You still own the building and the lease risk.

• DSTs. You own a fractional interest in a larger property, and the sponsor handles everything. You have no management duties, and no control.

You can also combine these, such as buying one property directly and putting the rest of your proceeds into a DST.

What to know about DSTs

A properly structured DST interest counts as real property for a 1031 exchange. But DSTs are securities. They're sold through licensed representatives and are usually limited to accredited investors. They're illiquid, often for several years, and you can't decide when the property sells. They carry sponsor fees, and distributions aren't guaranteed. Review the offering documents with your financial and tax advisors.

The exchange rules still apply

Whichever way you go, the same rules apply. You have 45 days from your sale closing to identify replacement property and up to and including day 180 to complete your purchase or purchases. To defer all of the tax, buy at least as much as you sell and reinvest all of your net equity. DSTs often carry debt, which can help you replace the loan you paid off.

Where we fit in

APX 1031 is a Qualified Intermediary. Our job is to make sure your exchange is set up and completed correctly, whatever you decide to buy.

While we don't sell DSTs or recommend investments, APX has partnered with licensed representatives and tax advisors for a concierge exchange experience. We provide an end-to-end exchange solution to effectively retire from being a landlord through the Landlord Retirement Concierge.

Next step

If you're thinking about stepping back, talk with your advisors about what you want your next property to do, and reach out to us before your sale closes so we can get your exchange set up.

APX 1031 is a Qualified Intermediary. We don't provide tax or legal advice; talk with your CPA or attorney about your situation.