For many longtime rental property owners, the question eventually changes. It is no longer simply, “Should I sell?” Instead, it becomes: How can I transition out of active property management without immediately giving up my real estate investment strategy? That question is especially relevant for California landlords who may have accumulated significant equity while also dealing with tenant issues, maintenance responsibilities, vacancies, capital improvements and the day-to-day demands of managing property.

A 1031 exchange may provide a path for eligible investors to sell investment real estate and reinvest into other qualifying real property while deferring certain capital gains taxes. Replacement property, however, does not always have to look like the property being sold. Depending on the investor’s goals, options may include a Delaware Statutory Trust, tenant-in-common ownership, triple-net property or another qualifying real estate investment. Understanding how these structures differ is an important first step in determining what the next stage of real estate ownership should look like.

Why Landlords Consider Moving Toward Passive Real Estate

Owning rental property can create income and long-term appreciation potential, but direct ownership also comes with significant responsibility. Tenant and lease management, maintenance and repairs, property management oversight, capital improvement decisions and exposure to a single property or local market can all become more burdensome as an investor approaches retirement or simply wants more freedom from day-to-day operations.

For some investors, the objective is not to leave real estate altogether. Instead, they want to remain invested while reducing the amount of time and operational responsibility required. Retirement and lifestyle changes, estate and succession planning, risk concentration and the desire for more predictable management responsibilities can all influence the decision to consider a more passive form of real estate ownership.

What Is a Delaware Statutory Trust?

A Delaware Statutory Trust, commonly called a DST, is a legal structure that can hold institutional-scale real estate on behalf of multiple investors. Rather than purchasing and directly operating an entire replacement property, an investor owns a beneficial interest in the trust. DST offerings may hold multifamily communities, industrial facilities, medical properties, retail assets, self-storage facilities and other types of commercial real estate. For qualifying transactions, certain DST interests may be eligible as replacement property in a 1031 exchange.

Potential Advantages of DST Ownership

DSTs can appeal to investors seeking a more passive real estate structure because professional sponsors typically handle property operations and management. Potential advantages can include limited day-to-day management responsibilities, access to larger properties, the ability to diversify an exchange across multiple properties or sponsors, a defined ownership structure and professional asset management.

Passive management, however, does not mean the investment is without risk. DST investors generally have limited control over major property decisions, and the investment itself may be illiquid. Investors therefore need to evaluate not only the property but also the sponsor, financing, fees, holding period and overall investment strategy.

What Is a TIC Investment?

A tenant-in-common, or TIC, structure allows multiple investors to hold fractional interests in the same real estate asset. Unlike a DST, investors are direct co-owners of the underlying property. TIC structures may provide investors with more direct ownership rights and potentially more participation in property decisions, but that additional involvement can also create additional complexity.

Depending on the structure, significant decisions may require agreement among multiple owners. TICs may therefore appeal to investors who want fractional ownership of larger real estate, more direct ownership rights and some involvement in property decisions without purchasing an entire asset individually. For investors whose main objective is eliminating management responsibilities, however, the level of involvement required by a TIC should be carefully evaluated.

What Is a Triple-Net Property?

A triple-net lease property, often called an NNN property, is typically leased to a tenant responsible for many of the property’s operating expenses. Depending on the lease, those expenses may include property taxes, insurance, maintenance or other operating costs. This structure can reduce some landlord responsibilities compared with traditional residential rental ownership.

The investor still owns the property directly, however, which means they may remain responsible for decisions surrounding financing, lease negotiations, tenant credit, property disposition and other ownership issues. NNN ownership can therefore reduce certain operational demands without creating the same level of passive ownership typically associated with a DST.

DST vs. TIC vs. NNN at a Glance

No structure is automatically better than another. The appropriate approach depends on the investor’s objectives, financial circumstances, risk tolerance, income needs and desired level of control. The same feature can even be an advantage for one investor and a disadvantage for another; limited control, for example, may appeal to someone who wants to stop managing property but frustrate an investor accustomed to making every decision.

Should You Exchange One Property Into Multiple DSTs?

One reason investors consider DSTs is the ability to potentially spread exchange proceeds across several properties, geographic markets or sponsors. Instead of selling one rental property and purchasing another single replacement property, an investor may evaluate several DST investments as part of the exchange. This can potentially reduce dependence on the performance of a single asset and create exposure to different properties or markets.

Diversification does not eliminate investment risk. Multiple properties can still be affected by broader real estate markets, interest rates, tenant performance and sponsor execution. Investors should therefore consider how each DST fits into the overall portfolio rather than assuming that simply owning more investments automatically creates an appropriate diversification strategy.

What Should Retiring Landlords Evaluate Before Choosing?

The replacement property decision should begin with the investor’s goals rather than the product. A DST, TIC or NNN property may each solve a different problem, which makes it important to define what the investor actually wants from the next stage of real estate ownership.

How Much Management Responsibility Do You Want?

Some investors want to eliminate virtually all operational responsibility, while others still want involvement in property decisions. An investor who enjoys selecting tenants, negotiating leases or controlling capital improvements may find a highly passive structure restrictive, while someone who wants to retire from those responsibilities may view the same limitation as a benefit.

How Important Is Liquidity?

DSTs and TIC interests are generally not designed as highly liquid investments. Investors should consider whether they may need access to the invested capital during the expected holding period and how the investment fits alongside other liquid assets, retirement income and anticipated expenses.

How Important Is Diversification?

An investor selling one highly concentrated property may want to evaluate whether spreading capital across multiple properties or sponsors fits their broader financial strategy. Diversification should be considered across property type, geography, sponsor and other relevant exposures rather than evaluated only by the number of investments owned.

How Much Control Do You Want?

Direct ownership provides substantially more control than most passive ownership structures, but that control also creates additional responsibility. Investors should determine how much authority they actually want over financing, management, leasing, capital improvements and disposition before selecting a replacement-property structure.

What Happens When the Investment Is Eventually Sold?

Replacement-property planning should include the eventual exit. Investors should understand potential holding periods, disposition processes and what choices could exist when an investment matures or is sold. A strategy that works well on the day of the exchange should also make sense several years later when the investor reaches the next decision point.

A 1031 Exchange Should Fit the Broader Retirement Plan

The decision to use a DST, TIC, NNN property or another replacement property should not occur in isolation. For many longtime property owners, a real estate transition intersects with retirement income, estate planning, tax planning, liquidity needs, family succession, risk concentration and future lifestyle goals.

This is one reason a 1031 strategy may involve multiple professionals, including tax, legal, estate and investment professionals. The objective should be a coordinated strategy rather than simply finding replacement property before a deadline. The structure selected today can affect income, liquidity, estate planning and future investment decisions for years to come.

How IPA 1031 Group Approaches Passive Real Estate Decisions

IPA 1031 Group helps investors evaluate potential replacement-property strategies as part of the broader transition away from active real estate ownership. That process can include evaluating different ownership structures, reviewing potential DST opportunities and discussing how factors such as diversification, liquidity, risk and management responsibilities fit the investor’s objectives.

A DST may be appropriate for some investors, while a directly owned property, TIC structure or another strategy may be more appropriate for others. The important decision is not simply which investment is available. It is determining which structure aligns with what the investor wants the next stage of real estate ownership to look like.

Frequently Asked Questions

Are DSTs completely passive?

DST investors generally do not handle the day-to-day operation of the underlying property. The sponsor or property manager typically handles those responsibilities, although investors also generally have limited control over major property decisions.

Can I use a 1031 exchange to move from a rental property into a DST?

Certain DST interests may qualify as replacement property for a 1031 exchange. Investors should review the specific offering and transaction with appropriate tax and legal professionals.

Is an NNN property more passive than owning an apartment building?

It can be. Triple-net lease structures can shift many operating expenses and responsibilities to the tenant, although the investor still owns the property directly and retains responsibilities associated with ownership.

Can I divide a 1031 exchange between several properties?

Investors may be able to acquire multiple qualifying replacement properties as part of an exchange, including potentially multiple DST interests. The transaction must still comply with applicable 1031 exchange requirements.

Which is safer: a DST, TIC or NNN property?

There is no universally safest structure. Each has different risks involving control, liquidity, tenant concentration, sponsor performance, financing, market conditions and property performance.

What if I no longer want to complete another 1031 exchange?

Investors should evaluate all available alternatives with their professional advisors. A 1031 exchange is one planning tool, not an obligation.

Ready to Explore Your Replacement-Property Options?

Considering selling a California rental property and stepping away from active management? IPA 1031 Group can help you evaluate DSTs and other replacement-property strategies based on your goals, timeline and desired level of involvement.