DST 1031 Exchange: Multifamily Market Update

What the Data Is Saying — and What It Means for 1031 Exchange Investors

What is a DST 1031 exchange? A DST 1031 exchange lets you sell investment real estate, defer capital gains taxes under Section 1031, and reinvest into a professionally managed, institutional grade property through a Delaware Statutory Trust, all with no landlord responsibilities. It’s one of the most tax efficient ways for accredited investors to step out of active real estate ownership and into passive income potential.

We were recently invited to join Capital Square, one of the top DST and 1031 exchange sponsors in the country, at a due diligence conference in Frisco, Texas. The event was all about digging into national multifamily data, reviewing how their portfolio has been performing, understanding what kind of product they’re focused on right now, and hearing their take on where the market is heading.

What follows is everything we took away from that trip. The data, the operator insights, and the questions we’re hearing most from investors right now. Whether you own a rental property and are starting to think about your next move, or you’re newer to DST 1031 exchanges and trying to figure out whether this structure makes sense, we wrote this for you.

We work with accredited investors across San Diego, Southern California, Hawaii, and nationwide. These are the conversations we’re having every day, and we want you to have access to the same information our clients do.

Table of Contents

1. What Is a Delaware Statutory Trust (DST)?
2. Demand vs. Supply: The Setup
3. Where Rents and Occupancy Stand Right Now
4. Market by Market Snapshot: Who’s Winning and Who’s Waiting
5. The Insurance Effect: The Expense Nobody Talks About
6. Vintage Matters: What Lenders Are Actually Looking At
7. DST vs. Direct Ownership: An Honest Comparison
8. Who Should Consider a Multifamily DST?
9. FAQ: How Does a DST Work?
10. FAQ: Is a DST Right for My 1031 Exchange?
11. FAQ: I Own Multifamily Property. Should I Sell Into a DST?

1. What Is a Delaware Statutory Trust (DST)?

If you’re new here or new to DSTs, let’s start with the basics because this is genuinely a complicated subject and we want to make sure you have a clear foundation before we get into the market data.

Simply put, a Delaware Statutory Trust is a legal entity formed under Delaware law that holds title to real estate. When you invest in one, you’re purchasing a fractional beneficial interest in the trust. Meaning you own a slice of the underlying property, but you don’t physically manage the asset, deal with tenants, or make any operational decisions. All of that is completely handled by what we call the sponsor.

The reason DSTs matter so much in the context of 1031 exchanges comes down to a 2004 IRS ruling, Revenue Ruling 2004-86, which clarified that a properly structured DST qualifies as “like-kind” real estate for the purposes of a Section 1031 tax-deferred exchange.

That was a really big deal.

It opened the door for investors to sell their investment property, roll the proceeds to a Qualified Intermediary and then into a DST, and defer their capital gains tax — all while stepping completely away from active management.

The properties inside DSTs are typically institutional grade assets. We’re talking about the kind of multifamily, small bay industrial, or net lease retail buildings that most individual investors couldn’t access on their own because they simply didn’t have enough cash or equity to get in. Purchase prices typically range from $30 million to $100 million or more. Through fractional ownership, an investor with $250,000 in exchange proceeds can own a slice of the same building that might otherwise require $5 million in equity. That’s the power of the structure.

The minimum investment is typically $100,000, and DSTs are only available to accredited investors. Accredited means a net worth over $1 million (excluding your primary residence) or annual income over $200,000 individually, or $300,000 jointly, in each of the past two years.

A few structural rules worth knowing: Once a DST is closed to investors, no new capital can be contributed, so there’s no capital call. The trustee can’t refinance or take on new debt. Leases can’t be renegotiated unless a tenant is insolvent. And any net cash must be distributed to investors, typically monthly. These are sometimes called the “Seven Deadly Sins” in DST circles, and they’re what keep the structure compliant as a passive investment and eligible for 1031 treatment.

2. Demand vs. Supply: The Setup

Here’s the core of what we want you to understand going into this piece: the multifamily story right now isn’t really about demand. It never was. It’s about supply. And what’s happening with supply right now is one of the most significant setups we’ve seen in years.

Let’s back up a little. Over the past few years, and on the tailwinds of the low interest rate environment COVID produced, developers took advantage of cheap capital and built thousands of units all over the country. Texas was a prime example. Builders were delivering new product left and right in Dallas, Houston, San Antonio, and Austin.

And honestly? They weren’t wrong to do it. Even with all that new supply hitting the market, these major metros had demand that largely kept up. People were moving from high cost-of-living coastal cities to the Midwest and Sun Belt in droves. Rents rose. Occupancy held. The music was playing and everyone was dancing.

But here’s where things get really interesting.

When interest rates started rising in 2023, the cost of capital went up fast and banks stopped lending on new projects the way they once were. It became very difficult to make a development deal pencil out. The result? New construction starts fell off a cliff.

According to Yardi Matrix, new multifamily construction starts dropped to roughly 363,000 units in 2024, compared to 708,000 units that started in 2022. That’s nearly a 50% decline in two years. Arbor Realty Trust puts it even more plainly: multifamily starts fell approximately 40% between 2023 and 2025, driven by higher financing costs and tighter underwriting standards. And it may actually be even steeper than those headline numbers suggest. Chris Nebenzahl, Vice President of Rental Research at John Burns Research & Consulting, noted that their on-the-ground client data shows multifamily starts down 8 to 10% year over year beyond what Census figures capture — pointing to a real disconnect between what’s being reported and what builders are actually doing.

In the Sun Belt cities that had been booming the hardest, expected apartment projects have been scaled back or cancelled entirely. The supply pipeline that developers were feeding is now draining. Yardi Matrix forecasts deliveries dropping from roughly 409,000 units in 2025 to about 317,000 in 2026, with further declines projected into 2027. CBRE estimates that by mid-2025, multifamily construction starts were approximately 74% below their 2021 peak.

Less new supply coming online has the potential to be a meaningful demand tailwind for existing property owners. Rental housing economist Jay Parsons put it simply:

“The demand story was never the problem. Supply topped demand. That’s basic Econ 101. Those demand drivers aren’t likely to disappear as supply dramatically thins out.”

– Jay Parsons, Rental Housing Economist

That’s the setup. Now let’s talk about where things actually stand.

3. Where Rents and Occupancy Stand Right Now

Rick Palacios Jr., Director of Research at John Burns Research & Consulting, summed up 2025 in one word: “underwhelming.” Honestly, that about covers it.

2024 and most of 2025 were not banner years for rent growth because of record high deliveries. Over 409,000 units in 2025 alone, nearly 25% above the pre-pandemic average of 317,000, put real pressure on the market. National average asking rents hovered around $1,735 to $1,755, with year over year growth ranging between 0% and 1.2% depending on the month and data source. National occupancy sat around 94.5%, which is healthy, but it’s down from the frothy highs of the COVID boom years.

For apartment operators, the summer of 2025 was particularly tough. Jay Parsons noted that effective rents over the combined June, July, and August period fell for the first time since the Great Financial Crisis. -0.23% which isn’t a dramatic drop but a real departure from the normal seasonal pattern of around +1% gains. On top of that, average concessions in stabilized properties soared to around six weeks free, the highest level since the early 2010s. Owners were giving away rent just to keep units full. That’s a tough spot to be in.

But here’s what we want to make sure you understand about national averages: they hide a lot. The headline numbers mask a story that’s really playing out as two completely separate markets depending on where you are geographically.

Looking ahead, CBRE expects average multifamily rents to grow 3.1% annually over the next five years which is above the pre pandemic average of 2.7%. For 2026 specifically, the industry consensus points to rent growth of around 2%. Jay Parsons said he’d “take the over” on that number if the economy produces steadier job growth, because it doesn’t take much demand to outpace a supply pipeline that’s shrinking as fast as this one is. People still need places to live. That fundamental doesn’t change.

4. Market by Market Snapshot: Who’s Winning and Who’s Waiting

This is where the national average becomes almost useless as an investment signal. The real story is geographic. And the data from Yardi Matrix, CoStar, and Cushman & Wakefield tell a consistent story.

The Outperformers: Midwest and Northeast

These markets didn’t overbuild. Supply stayed constrained, demand stayed consistent, and landlords held pricing power. The numbers reflect it clearly.

Chicago has been the standout performer. Rent growth ranging from 3.6% to 8.1% year over year, among the strongest numbers in the country. Occupancy has stayed tightly held and Class B and C product in particular has historically benefited from renters who simply can’t afford new luxury or Class A supply.

New York City and Northern New Jersey have seen rent growth of 2.8% to 5.8% year over year, with occupancy in Northern New Jersey exceeding 97%. That’s one of the tightest rental markets anywhere in the country.

Kansas City has consistently posted rent growth of 2.5% to 4.1% year over year. It’s not a flashy market, but it’s a disciplined one. There are low supply additions, steady employment base, and a renter population that isn’t going anywhere.

Columbus, Cincinnati, and Philadelphia round out the consistent performers. These are markets where the economics of new construction are difficult, which means existing assets have a natural moat.

The Overbuilt: Sun Belt Recovery in Progress

These markets got hit hard, and the data shows it. But here’s the thing – a lot of them are setting up for a potential rebound once the supply hangover clears.

Austin delivered more new apartment units as a percentage of existing stock than virtually any major U.S. metro, roughly 7.5% of total stock in 2025 alone. The result: rent growth of -4.3% to -5.6% year over year, and occupancy around 92.3%. The good news is that Austin’s construction pipeline has shrunk dramatically, and job growth projections are still strong. By 2026 to 2027, the supply/demand math could flip. That said, John Burns and Jay Parsons flagged in their joint January 2026 outlook that even as the supply bottleneck eases, the hangover from 2024 to 2025 lease-ups will linger — especially in the Sun Belt markets that got hit hardest. The pipeline thinning doesn’t mean the pain disappears overnight.

Phoenix has followed a similar trajectory. Strong absorption (5.3% of stock absorbed in 2025), but negative rent growth of -2.6% to -3.7% thanks to persistent new deliveries. Like Austin, the pipeline is thinning and things are starting to look a little better moving forward.

Dallas-Fort Worth remains the single largest development pipeline in the country, keeping rents under pressure (-2.0% to -2.1% year over year). Occupancy is around 92.9%. DFW’s job market is strong enough to support eventual absorption, but the near-term overhang is real.

Tampa, Denver, and Las Vegas round out the challenged markets. Each posted negative rent growth through most of 2025, driven by excess supply. Denver’s combination of oversupply and a softening tech job market made it one of the tougher markets in the data set.

The Nuanced Middle: Sun Belt Markets Turning the Corner

Not every Sun Belt market is the same story, though. Atlanta actually posted positive occupancy growth of 0.6% in 2025. Charlotte and Nashville both absorbed enormous volumes of new supply with 6 to 7%+ of stock in 2025. That remains on the watch list, but their employment and migration tailwinds are real and shouldn’t be dismissed. San Francisco, long considered a challenged market, actually posted some of the strongest rent growth in the country at 2.0% to 6.2% year over year, as tech hiring stabilized and new supply stayed minimal.

The takeaway here is simple: market selection has never mattered more in multifamily than it does right now. Owning the right asset in the wrong market can significantly undermine the whole thesis. DST sponsors who are doing their homework are paying very close attention to these geographic distinctions.

And so are we.

5. The Insurance Effect: The Expense Nobody Talks About

We talk about insurance constantly with our clients, probably more than any other topic besides taxes, because it’s become one of the single biggest threats to net operating income in multifamily. Most investors had no idea these headwinds were coming five years ago.

Here’s what happened: climate events got more frequent and more expensive, reinsurance markets tightened globally, and property owners across the country started getting renewal quotes that looked like typos.

Not fun.

According to the Federal Reserve Bank of Minneapolis, property insurance premiums in 2024 were double what they were in 2021, which is more than six times the increase in the Consumer Price Index over the same period. Before the pandemic, average multifamily insurance costs hovered around $30 per unit per month. By late 2023, RealPage data showed that had climbed to roughly $65 per unit per month. That’s a 119% increase in four years.

Florida got hit hardest. Fort Lauderdale saw annual premiums reach $1,430 per unit after a 53% year over year spike. In Miami, insurance consumes as much as 20% of total operating expenses at affordable properties. Texas was hit by hailstorms, winter storms, and flooding pushed average premiums up 43% per unit over the same period. Even Upper Midwest operators, traditionally insulated from the worst of it, reported premiums rising 45% from 2023 to 2024 alone.

One property owner survey respondent summarized it perfectly: over 50% of their total operating expense inflation since 2020 was attributable to property insurance premium increases alone. Another noted that insurance went from 6% of their total operating expenses in 2020 to a forecasted 14% in 2024. Between 2015 and 2024, Trepp data shows multifamily NOI grew by 5.58% annually. Insurance costs grew at more than twice that rate. It’s a margin squeeze that doesn’t always show up in the rent growth headlines but it flows directly to the bottom line.

Why does this matter for DST investors?

When you’re evaluating any DST offering, the insurance assumptions baked into the underwriting are one of the most important (and candidly, most frequently overlooked) line items to scrutinize. A property underwritten at $40 per unit per month in insurance three years ago may now be running $70 or more. That difference directly affects cash flow and distributions. Experienced sponsors who have stress tested their expense projections, own properties in lower risk markets, and maintain well maintained physical plants are going to have a materially different outcome than those who didn’t plan for it. And honestly, that’s really hard to do unless you’re a specialist in this product type. This is exactly why working with an experienced DST advisor matters so much.

There is some good news here. The NMHC’s 2024 State of Multifamily Risk Report noted the first stabilization in property insurance rates since 2017, ending 27 consecutive quarters of growth. But liability lines remain elevated, catastrophic events continue to hit the market, and the LA wildfires added fresh pressure heading into 2025. This is a line item to watch for years, not months.

6. Vintage Matters: What Lenders Are Actually Looking At

One of the most interesting things we took away from the Capital Square conference how lenders are approaching existing properties based on when they were built. This was super interesting to us.

Here’s the headline: vintage is everything right now, and the market is rewarding it.

In 2025, the most active multifamily transactions have involved older properties, like those dating back to the 1960s, 70s, and 80s. CoStar and Altus Group data show that in most major metros, over 60% of 2025 multifamily trades involved buildings from the 1960s or earlier. That’s not a coincidence. It’s a capital markets story.

Agency lenders like Fannie Mae and Freddie Mac are the most competitive and consistently available source of debt in multifamily, and they strongly prefer stabilized, existing assets. Meanwhile, 1970s vintage assets with materials like aluminum wiring which carry known fire hazard risks, are facing a much harder conversation with lenders. There’s simply no institutional liquidity for those types of assets right now. On the other hand, a well maintained mid 1980s or 1990s and newer vintage property in a solid market with stable occupancy has access to the best financing available in commercial real estate today.

The ripple effects of this are significant and worth understanding:

A two tier lending environment has emerged. Properties with access to agency debt are trading at tighter cap rates and attracting more buyers. Properties that can’t access that debt  are facing real stress. According to MBA and Trepp data, the largest concentrations of loan maturities are in 2025 and 2026. Many of those loans were originated with tight margins and interest only periods that have now expired. For a lot of those deals, the refinance math simply doesn’t work at today’s rates.

This reinforces the DST model when the sponsor picks their spots. A well selected, institutionally managed recent vintage asset in a supply-constrained Midwest or Northeast market with cash flow, manageable insurance exposure, and agency eligible financing is exactly the kind of product that might make sense right now.

One more thing worth saying: vintage doesn’t mean neglected.

Lenders and insurers are increasingly scrutinizing older properties for outdated electrical panels, aging roofs, and infrastructure that hasn’t been updated. A well capitalized sponsor who invests in their assets earns a fundamentally different financing experience than one running lean on capex. Physical due diligence on any DST offering matters more today than it ever has.

7. DST vs. Direct Ownership: An Honest Comparison

We get this question constantly, and we always try to give a straight answer. Here’s how the two structures actually compare.

Management Responsibility

Direct ownership: You deal with everything or you pay a property manager to deal with it, which still means your oversight, your approval on capital decisions, and your time when something goes sideways.

DST: Zero management responsibility. The sponsor handles acquisitions, financing, leasing, maintenance, tenant relations, and reporting. You receive any potential distributions monthly and a year end tax document called a grantor letter. That’s the whole job.

Asset Quality and Access

Direct ownership: You’re limited to what your capital can support. For most individual investors, that means smaller, older, lower quality properties in markets you’re already familiar with. Not necessarily the markets that are performing best.

DST: You get access to institutional grade assets typically priced between $30M and $100M+, with professional management, institutional financing, and geographic diversification built in. Minimums are generally $100,000. A $500,000 exchange could be spread across multiple DSTs in multiple markets and property types, potentially helping reduce concentration risk in a way that’s just not possible with direct replacement property.

Tax Treatment

Direct ownership: A traditional 1031 exchange defers capital gains into a directly held replacement property. You maintain full depreciation, full control, and full liability.

DST: The capital gains deferral is identical. The IRS currently treats DST beneficial interests as direct real estate ownership under Revenue Ruling 2004-86. Your cost basis carries forward, depreciation pass-through continues (typically reported via a grantor trust letter rather than a K-1), and any potential income flows to Schedule E on your tax return, taxed as ordinary income.

We’re not tax advisors, so we encourage you to speak with your tax professional about this subject.

Liquidity

Direct ownership: Illiquid, but you control the timing of the sale.

DST: Also illiquid. But here’s the part we always make sure clients understand: you don’t control the timing of the sale. The sponsor decides when to exit, typically between a 5 and 7 year hold period. There’s no secondary market for DST interests in the traditional sense. If there’s any chance you’ll need access to this capital, a DST isn’t the right fit.

Estate Planning

This is honestly one of our favorite things to talk about because it’s so underappreciated. Unlike a directly owned building, a DST interest can be divided among multiple heirs cleanly and without forcing a sale. And through the step up in basis at death, heirs may be able to significantly reduce, or in some cases completely eliminate, the deferred capital gains tax obligation. For estate planning purposes, that can be a meaningful structural advantage. We always encourage investors to work through this with their estate planning attorney and tax professional.

The Bottom Line

Neither structure is universally better. It really comes down to what you’re trying to accomplish. Direct ownership makes sense if you want control, have the time and expertise to manage an asset, and are building a long term portfolio. A DST 1031 exchange makes sense if you’ve built significant equity in real estate, want to defer taxes, and are ready to step away from active management, while keeping your capital in real estate.

8.  Who Should Consider a Multifamily DST?

Not everyone is a candidate for this structure, and we’d rather be upfront about that than waste your time. Here’s an honest look at who the DST 1031 exchange tends to serve really well and who it probably doesn’t.

You might be a good candidate if:

• You own investment real estate with significant appreciated value and are facing a large capital gains tax bill upon sale
• You want to complete a 1031 exchange but don’t want to own and manage another property, or you’re running out of time in your 45 day identification window
• You’re approaching or in retirement and want the potential for passive real estate income without landlord responsibilities
• You want to diversify out of a single, concentrated real estate position into a portfolio of institutional assets
• You’re a multifamily owner who is done with the day to day management intensity and wants to redeploy into something professionally operated
• You want estate planning flexibility. The ability to divide real estate interests among heirs cleanly and efficiently

You’re probably not a strong candidate if:

• You need access to your capital in the near term. DSTs are illiquid and that’s not negotiable
• You want to maintain control over property decisions, timing of exit, or management direction
• You’re not an accredited investor
• Your primary goal is maximum appreciation rather than potential income and tax deferral

9.  FAQ: How Does a DST 1031 Exchange Work?

These are the questions we hear most from investors who are new to DSTs and want to understand the structure before we dive into specifics together.

What does DST stand for in real estate?

DST stands for Delaware Statutory Trust. It’s a legal entity formed under Delaware law that holds title to real estate. Investors purchase fractional beneficial interests in the trust and receive a pro-rata share of any potential income and eventual sale proceeds. One thing that always surprises people: despite the name, the properties a DST holds can be located anywhere in the United States. And DST 1031 exchanges are available to accredited investors in all 50 states.

How do DST investors actually make money?

Two potential ways. First, targeted monthly cash distributions from any rental income the property generates, net of expenses and debt service. This is typically reported as ordinary income on Schedule E of your tax return. Second, a potential appreciation gain when the DST sponsor ultimately sells the property (usually after a 5 to 7 year hold period), at which point you can take the proceeds and pay capital gains tax, roll them into another 1031 exchange, or a combination of both.

What are typical cash on cash returns for a multifamily DST?

Historically, cash on cash distribution rates for DSTs have a range but this varies meaningfully by property type, market, leverage, and the interest rate environment. In a higher rate environment like today’s, distribution rates on leveraged DSTs may be compressed compared to historical norms. Every DST has its own underwriting, so we always encourage prospective investors to review the Private Placement Memorandum carefully and have a real conversation with a DST specialist about what they’re looking at.

Is a DST a security or real estate?

Technically, it’s both. The IRS treats your DST interest as direct real estate ownership which is why it qualifies for a 1031 exchange. But the SEC treats it as a security because you’re purchasing a fractional interest, which is why DST investments can only be offered through licensed broker-dealers and registered investment advisors, and only to accredited investors.

Who manages the property in a DST?

The sponsor (sometimes called the trustee or asset manager) handles everything: property management, leasing, capital improvements, financing, and reporting. Investors have zero operational role. For anyone who’s spent decades dealing with tenants and toilets, this is usually the part of the conversation where their whole face changes.

Can I lose money in a DST?

Yes, and we’d never suggest otherwise. DST investments are not guaranteed and carry real risk, including the potential loss of your entire principal. For example, declining property values, tenant vacancies, increased operating costs, changes in market conditions, and the possibility that the property is sold at a loss are all possible outcomes. The structure doesn’t eliminate risk, it just shifts the nature of your exposure and removes the management burden. Any investor evaluating a DST should read the PPM thoroughly and work with an independent DST advisor and CPA.

What is a grantor trust letter, and why do I get one instead of a K-1?

Unlike a partnership or syndication, which issues a Schedule K-1, a DST sponsor generally issues a grantor trust letter before tax returns are due. That’s because the IRS treats DST investors as the direct beneficial owners of the underlying real estate, not as partners in a business. The grantor trust letter gives you your pro-rata share of rental income, expenses, and operating information, which you use with your tax professional to complete Schedule E on your personal return.

Are there any states where DST income isn’t taxed?

DST income is taxed in the state where the property is physically located not where you live. If your DST holds property in Texas, Nevada, Florida, or other no income tax states, you may have no state tax obligation on that income regardless of where you reside. This is especially relevant for investors in California and Hawaii, who are often dealing with significant state tax exposure. It’s worth a real conversation with your CPA before investing.

10. FAQ: Is a DST Right for My 1031 Exchange?

These questions typically come from investors who are actively in a 1031 exchange or getting close to one and want to understand exactly how a DST fits into the picture.

Can I use a 1031 exchange to invest in a DST?

Yes, and this is fully acknowledged by the IRS. Revenue Ruling 2004-86 stipulated that a properly structured DST currently qualifies as “like kind” real estate under Section 1031. That means you can sell your investment property, reinvest the proceeds into one or more DSTs, and defer federal capital gains tax, depreciation recapture, and in most cases state capital gains taxes, including California and Hawaii state taxes.

What are the 1031 exchange deadlines for a DST?

The same rules that apply to any 1031 exchange apply here: 45 days from the closing date of your relinquished property to formally identify your replacement property with your Qualified Intermediary, and 180 days from closing to complete the purchase. One of the practical advantages of DSTs is that they typically close within 3 to 5 business days once paperwork is submitted and an investor is shown to be accredited. The transaction must be approved by a broker dealer or registered investment advisor before any formal investment is made. For anyone who’s ever had a traditional replacement property deal fall apart inside the window, that alone is a huge relief.

How many DSTs can I identify in a 1031 exchange?

You can identify multiple DSTs. Under the Three-Property Rule, you can identify up to three properties regardless of value. Under the 200% Rule, you can identify any number of properties as long as their combined fair market value doesn’t exceed 200% of your relinquished property’s value. That flexibility is one of the things we love most about this structure. Tt lets you diversify your exchange across multiple markets, asset types, and sponsors in a single transaction. It can get complicated though, so it’s important to work with someone who knows what they’re doing.

Do I have to reinvest 100% of my proceeds into a DST?

To fully defer capital gains tax, yes. You need to reinvest 100% of the equity and replace the remaining amount that was sold, with either debt or more cash, so the replacement property is equal to or greater than the value of what you sold. If you reinvest less, the leftover cash is called “boot” and it’s taxable in the year of the exchange. One thing we really like about DSTs is that because they have preassigned debt structures built in, it’s often possible to match your equity and debt replacement requirements very precisely. sometimes down to the dollar.

What happens to my depreciation when I do a 1031 into a DST?

Your depreciation basis generally carries over. If you had remaining depreciation on your relinquished property, that basis transfers to the DST interest and you continue depreciating it. If you purchase DST interests with a greater total value than what you sold, that additional basis could potentially be depreciated on a straight line schedule over 27.5 years for multifamily properties, or used with cost segregation in partnership with your tax professional.

Can I do a 1031 exchange out of a DST when it sells?

Yes, and this might be the most powerful feature of the entire structure. When a DST sells its underlying property, you can roll your proceeds into another 1031 exchange, including another DST. Theoretically, you can continue deferring capital gains tax across multiple exchange cycles indefinitely. Combined with the step up in basis at death, the DST can function as a multi-generational tax deferral vehicle when structured thoughtfully. We love walking clients through this part of the conversation.

What if I can’t find a suitable replacement property within 45 days?

This is exactly where DSTs shine. Because DST offerings are prepackaged and prefinanced, you can identify them immediately. On day one of your exchange if needed. We always recommend identifying one or more DSTs alongside any direct replacement properties you’re pursuing, as it can act as a backup in case a deal falls through. The peace of mind alone can be worth it.

What’s the difference between a DST and a TIC (Tenancy in Common)?

Both allow fractional real estate ownership, but they work very differently. In a TIC, each investor holds direct title to their fractional share and typically has voting rights on major decisions but that also means unanimous agreement is required which can get complicated fast. DSTs replaced TICs as the preferred 1031 exchange vehicle because the DST structure is viewed as cleaner, fully passive, and confirmed as like kind property by the IRS.

What is non-recourse debt, and why does it matter for DST investors?

Most DSTs are financed with non-recourse loans, meaning the lender’s only remedy in the event of default is the property itself, not your personal assets. While you can lose your invested principal if the property declines and defaults, your home, your bank accounts, and your other investments are protected from the lender. It’s a structural protection that doesn’t exist in traditional recourse financing.

11. FAQ: I Own Multifamily Property. Should I Sell Into a DST?

These questions come from landlords and multifamily owners who are thinking about making a move and want to understand what a DST 1031 exchange exit actually looks like in practice.

I’ve owned my apartment building for 20 years. What’s my tax exposure if I sell without a 1031 exchange?

This is the question that tends to stop people in their tracks when they actually run the numbers and partner with tax professionals who run them all the time. After 20 years, unless you’ve been reinvesting in the property, most of your original depreciation has been used up. When you sell, you’re looking at federal capital gains tax (typically 15% to 20%), depreciation recapture at 25%, the 3.8% Net Investment Income Tax if your income exceeds certain thresholds, and state capital gains taxes where applicable. In California or Hawaii, your combined effective tax rate on the gain could approach or exceed 40%. On a property that’s appreciated significantly, that’s a number that changes the conversation quickly.

Can a DST help me get out of active management without triggering that tax?

Yes and this is really the core use case for a DST 1031 exchange. You sell your multifamily property, your Qualified Intermediary holds the proceeds, and you reinvest into one or more DSTs within the 45 to 180 day window. Your capital gains tax is deferred, your depreciation basis carries forward, and starting from the first month, you have the potential to receive passive real estate income with zero management responsibility. For operators who are burned out or approaching retirement, this is often one of the most impactful financial decisions they’ve ever made.

My apartment building is in a market with a lot of new supply. Should I be worried about holding it?

That really depends on the specific market and where you are in the rent cycle. If you’re in Austin, Phoenix, Dallas, or another supply heavy Sun Belt market, the near term picture is genuinely challenging. Muted or negative rent growth, elevated concessions, and occupancy pressure from new deliveries are a key factor. A DST 1031 exchange gives you the ability to move out of a challenged market position and into a diversified portfolio of assets in markets where supply and demand might be better balanced. Whether that makes sense depends on your specific situation, which is why we always start with a conversation.

What happens to my depreciation if my property is already fully depreciated?

Your fully depreciated cost basis carries over to the DST. That means you no longer have a depreciation shield on that original portion. But if the total value of the DST interests you purchase is greater than what you sold, that additional basis can be depreciated fresh over 27.5 years. Your CPA will calculate this specific to your exchange structure, and it’s one of the numbers we always like to model out before you make any decisions.

Can I split my proceeds across multiple DSTs in different markets?

Absolutely. And honestly, this is one of the most compelling things about the structure. Rather than concentrating your capital in a single replacement property in a single market, you can diversify across multiple DSTs, multiple property types, and multiple geographies. A $2 million exchange, for example, might be spread across three or four DSTs. For instance, a Midwest multifamily asset, a small bay industrial net lease property, and a Sun Belt apartment community that’s past its supply peak and more. That kind of diversification is simply not achievable for most individual investors buying direct replacement property.

What questions should I ask a DST sponsor before investing?

This is one of the most important questions you can ask, and the answers reveal a lot. You want to know: How long has the sponsor been operating, and what is their full cycle track record on previous DSTs (meaning properties that were actually sold, not just acquired)? How has insurance expense moved over the past three years? What is the debt structure: fixed, interest-only, or floating and when does it mature? What is the current occupancy and how does it compare to what was underwritten? What is the financial strength of the company? Are their books audited and by whom? The strength of the sponsor is very important.

What’s the difference between a Class A and Class B multifamily DST?

Class A properties are newer, typically built within the last 10 to 15 years with higher end finishes and amenities, commanding top of market rents. Class B properties are older, with more modest finishes, serving a broader renter demographic. In the current market environment, Class B has actually outperformed Class A in many markets because almost all new supply has entered the Class A tier. Meaning Class B properties face less direct competition and tend to hold occupancy and rent more reliably during supply waves.

One word of caution from John Burns that we think every investor should hear:

“When a broker says B/C, you and I just know it’s a C.” — John Burns, John Burns Research & Consulting

It’s a reminder that asset class labels in real estate are marketing as much as description. When you’re evaluating a DST, look at the actual physical condition, the actual rent comparables, and the expense history, not just the letter grade on the cover page. We do this work on behalf of every client we work with. We tour the assets and get an idea of the tenant base, the surrounding market and various other data points.

Can I use a DST to defer taxes if I’m selling a property I inherited?

Yes. If you’re inheriting property that you intend to hold as an investment, you can complete a 1031 exchange into a DST. There’s an important nuance though: if you inherited the property and received a step up in basis to fair market value at the time of inheritance, you may have little or no capital gains to defer. In that case, the urgency of a 1031 exchange is reduced, and the decision is more about estate planning and income strategy than tax deferral. Work through the specific numbers with your CPA or financial advisor before making any moves.

How do I get started with a multifamily DST investment?

It starts with a conversation, never a transaction. Before anything else, we need to understand your timeline, your tax exposure, your income needs, your liquidity requirements, and your estate planning goals. That’s how we find the right fit. At Aloha Wealth Partners, we work with accredited investors in Southern California, Hawaii, and nationwide, and that first conversation is always the starting point. There’s never any pressure to do anything until it genuinely makes sense for you.

The Bigger Picture: What We Took Away from Frisco

When you pull all of this together, a few themes emerge pretty clearly for anyone thinking about multifamily DST 1031 exchanges in today’s market.

The supply cliff is real and it’s going to matter. With starts down dramatically and deliveries expected to keep declining into 2026 and 2027, existing properties in supply constrained markets have the potential to hold occupancy and pricing power that new construction simply can’t compete with for a while. Yardi Matrix projects roughly 317,000 new units available in 2026 which is a significant step down from the 409,000 delivered in 2025. CBRE is forecasting rent growth of 3.1% annually over the next five years, which is above the pre-pandemic trend.

What should investors actually expect from 2026? John Burns, founder of John Burns Research & Consulting, called it potentially “one of the most boring years in my career” – low growth in both rents and home prices — but with an important caveat: it “will vary a lot by market.” That market by market variance is the whole ballgame right now. Jay Parsons framed the overall posture as “measured optimism” which is might be a good way to look at things. Excited about the setup but not pretending the near-term is frictionless.

Midwest and Northeast multifamily is having a moment. The Sun Belt captured most of the attention and capital over the last decade, but the data right now points to Chicago, New York, Kansas City, and similar markets as the rent growth leaders. That’s where supply and demand are in better balance, and that’s where we’re seeing some of the most thoughtfully structured DST product being originated.

Expense management is the new alpha. When rent growth is modest, the operators who outperform are the ones who manage costs like insurance, taxes, utilities, and capex with real discipline. Before investing in any DST, ask about the operating expense trajectory over the past three years. The answer tells you a lot about how a sponsor actually runs their business.

And finally, the structural case for renting is durable. The National Association of Realtors reported that the median age of first time homebuyers reached 38 in 2024 which is seven years older than the pre pandemic norm. Home prices have risen more than 54% over five years while wage growth has lagged at roughly half that pace. The premium to buy versus rent has exceeded 30% nationally. These aren’t short term headwinds. They’re structural conditions that keep rental demand elevated for years.

That’s the backdrop for what Capital Square and sponsors like them are underwriting right now. It’s not a simple market. But it’s a market with real opportunity if you know where to look and what questions to ask.

A huge thank you to Capital Square for inviting us out to Frisco, diving deep into the data with us, and to Jay Parsons for the incredible insight. We really appreciate the opportunity and look forward to sharing more of what we’re learning with our clients and community.

References:

En route to Frisco, Texas for a Capital Square due diligence conference on multifamily DST 1031 exchange investments.

Taking notes at the Capital Square conference — digging into the multifamily and DST 1031 exchange market data.

Reviewing Capital Square’s presentation on Opportunity Zones and DST real estate investment strategies.

They’re off! Skyler and Justin heading to Texas for the Capital Square multifamily DST due diligence conference.

Capital Square hosted advisors and investors for a dinner as part of the two-day due diligence conference in Frisco, Texas.

A packed room at the Capital Square due diligence conference in Frisco, Texas. Advisors reviewing multifamily and DST market data for 2026.

Capital Square’s Co-CEO, Whit Huffman presenting on DST and Opportunity Zone Fund investment strategies at the Frisco, Texas due diligence conference.

Rental housing market data one of the research sessions at the Capital Square DST due diligence conference in Frisco, Texas.

The Capital Square leadership panel at the Frisco, Texas conference discussing multifamily market conditions and the DST 1031 exchange investment outlook for 2026.

A Capital Square presenter walking through multifamily property details at the Frisco, Texas due diligence conference — the kind of asset-level research that goes into every DST 1031 exchange offering.

Justin from Aloha Wealth Partners in the room for the Capital Square due diligence conference taking in the data so our clients don’t have to.

• https://www.realpage.com/analytics/rising-insurance-costs-apartment-sector/
• https://www.yardimatrix.com/blog/new-multifamily-construction-to-slow-down-in-2024/
• https://www.cbre.com/insights/books/us-real-estate-market-outlook-2025/multifamily
• https://www.yardimatrix.com/blog/national-multifamily-market-report-february-2025/
• https://www.minneapolisfed.org/article/2025/rising-property-insurance-costs-stress-multifamily-housing/
• https://www.realpage.com/analytics/opex-moderation-2q25/
• https://www.multifamilydive.com/news/apartment-starts-multifamily-permits-census-data/758209/
• https://www.federalreserve.gov/econres/notes/feds-notes/rising-property-insurance-costs-and-pass-through-to-rents-for-apartment-buildings-20250919.html
• https://www.yardimatrix.com/blog/national-multifamily-market-report/
• https://www.multifamilydive.com/news/rent-outlook-2026-multifamily-apartment/809477/
• https://pod.wave.co/podcast/the-rent-roll-with-jay-parsons/ep65-john-burns-15-predictions-for-apartments-sfr-2026