Being a landlord is a job you didn't mean to take. Your Half Moon Bay rental's equity doesn't have to keep employing you — a 1031 exchange moves it, tax-deferred, into real estate that doesn't call at midnight.
Section 1031 of the tax code lets you sell investment property and reinvest the proceeds in like-kind investment property while deferring capital-gains tax — federal and California — that would otherwise come due at sale. On a long-held Half Moon Bay rental, that deferral routinely keeps six figures working for you instead of leaving in April.
Every letter you receive about this assumes the answer is yes. It depends on facts only your accountant can see, and the rules below are general — nothing here has been applied to your property.
The test is whether the property was held for productive use in a trade or business or for investment, which turns on intent and on what your records show. Advisers commonly point to one to two years of genuine rental use because that is the pattern IRS rulings and court decisions have accepted — not because the code says so.
Revenue Procedure 2008-16 covers dwelling units: owned at least 24 months before the exchange, rented at fair market rent at least 14 days in each of those years, and personal use no more than 14 days or 10% of the days rented, whichever is greater. Meet it and the holding question will not be challenged. Miss it and you are arguing intent.
Days you or your relatives occupy the property count against you unless market rent was paid. It is not about which address you call home — it is the occupancy days on this property and whether rent was charged.
Forty-five days from closing to identify the replacement property in writing, 180 to close. Both run from the same day and neither is extended for any reason. A qualified intermediary must hold the proceeds throughout — touch the money and the exchange fails.
Exchange with a family member or an entity you control and both sides must hold for two years afterwards. And a property acquired through an exchange that later becomes your home must be held at least five years, or the sale is fully taxable.
The state follows the federal rules and adds no holding period of its own. It does add reporting: exchange California property into replacement property in another state and you file FTB Form 3840 every year until the deferred gain is recognised.
If it turns out the property does not qualify, that is worth knowing before a 45-day clock is running rather than after.
A DST is fractional ownership of institutional real estate — apartment communities, medical, industrial, net-leased retail — and an interest in one qualifies as like-kind replacement property. You identify it inside the same 45 days you would identify a building. After that there are no tenants, no toilets and no 2am calls: the sponsor runs the asset and the deferral holds.
It is the route most long-time landlords take when the goal was never to own one particular house — it was to keep the equity working without the job attached. It is not the right answer for everyone, and the reasons why are worth reading before you get anywhere near a deadline.
DST owners have no operating control. That is what makes it passive and it is also a genuine loss of control you do not get back.
There is no market to sell into. You are in until the sponsor exits, which can take years and does not run to your schedule.
They are set by the sponsor and paid out of what the property actually earns, after fees and debt service. They can be reduced or suspended.
Debt at the end of a loan term generally cannot be refinanced inside the trust without converting the structure, and a transaction built or timed wrongly can fail 1031 treatment altogether — which brings the deferred gain and depreciation recapture due at once.
I am a real estate broker, not a securities representative — I cannot offer, recommend or sell a DST, and nothing on this page is an offer. Start with me: we go through your sale, your debt and what would actually be left to exchange. If a DST still fits after that, I introduce you to Chris Cole at JRW Investments, who works on these full time.
Talk it through with Tim →JRW Investments is not affiliated with this site. Securities, when offered, are offered by Lighthouse Capital Group, LLC, member FINRA/SIPC; the firm can be checked on FINRA BrokerCheck. DST interests are sold only by private placement memorandum to accredited investors and involve risk including the loss of principal.
A qualified intermediary (QI) must be engaged before closing — proceeds can never touch your hands, or the exchange dies.
Occupied or vacant — the tenant playbook and this one work together. Proceeds go straight to the QI.
Name the replacement property (or DST) in writing under the identification rules.
The QI funds the purchase; the gain rides forward, deferred in full.
See the full picture on any Half Moon Bay property — value it, and model exactly what you’d net.
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On the replacement property itself: outside California I do not handle the purchase and will refer you to a commercial broker in that market. In California I represent buyers on commercial property myself, and on that side I am paid by that transaction.
This guide is general information, not tax or investment advice. 1031 exchanges have strict rules and deadlines; DSTs are securities offered through licensed channels and involve risk. Engage a qualified intermediary and consult your CPA before acting.