You Don't Have to Manage Apartments Forever. Here's the Tax-Deferred Off-Ramp.
How San Diego apartment owners are using 1031 exchanges into DSTs to go passive without triggering a massive tax bill.
By Nick Hernandez ·
I talk to a lot of long-term apartment owners in San Diego who are in the same spot.
They bought 15 or 20 years ago. The building has doubled or tripled in value. They’ve done well. But they’re tired. Tired of tenant calls, deferred maintenance decisions, rising insurance, and the general weight of being a hands-on landlord.
They want out. But when they look at the capital gains bill from selling, they feel stuck. So they keep going.
What most of them don’t realize is there’s a 1031 exchange option specifically designed for this situation.
What’s a DST?
A Delaware Statutory Trust is a fractional ownership structure that qualifies as replacement property in a 1031 exchange. You sell your apartment building, work with a qualified intermediary just like a traditional 1031, and place your proceeds into a professionally managed, institutional-grade property or portfolio.
You defer your capital gains. You stop managing. And you start collecting passive monthly distributions.
The properties inside DSTs are typically large-scale assets: 200-unit apartment communities, medical office buildings, industrial warehouses, net lease retail. The kind of stuff a solo landlord would never access on their own. A professional sponsor acquires and operates the asset. You just own a piece.
Why this appeals to San Diego owners specifically
San Diego multifamily has had a great run. A lot of owners are sitting on six- or seven-figure embedded gains in buildings they bought in the early 2000s or 2010s. Selling outright could mean a combined federal and state tax hit north of 30%. That math keeps people stuck in properties they no longer want to own.
A DST lets you move that equity into something passive without triggering the tax event. And here’s the part that matters for estate planning: when you pass, your heirs receive a stepped-up basis. The deferred gain goes away. That’s a generational benefit that a lot of owners overlook.
What to watch out for
I’d be doing you a disservice if I didn’t flag the downsides.
DSTs are illiquid. You’re typically locked in for five to ten years with no secondary market to speak of. You have zero control over property-level decisions. If the sponsor mismanages the asset or the market turns, you’re along for the ride.
Not all sponsors are equal. Some have strong track records and conservative underwriting. Others are selling a dream with aggressive projections. You need to vet the sponsor the same way you’d vet a general contractor, maybe more carefully.
And DSTs aren’t for everyone. If you want control, flexibility, or the ability to force value through renovations, this isn’t your play. This is for people who have decided they’re done operating and want to preserve their wealth passively.
The conversation worth having
If you’re a San Diego apartment owner north of 55 and you’ve been holding a building mostly because selling feels too expensive, it’s worth exploring this before you list.
Not every owner ends up in a DST. Some realize a traditional 1031 into a NNN lease property is a better fit. Others decide to hold and hire professional management. But knowing your options changes the way you think about the decision.