Passive Real Estate Income

Passive real estate income describes rental or distribution income received without active day to day management responsibility. For Orange County investors completing a 1031 exchange, the most common path to converting active ownership into passive income is a Delaware statutory trust, commonly called a DST. A DST holds title to institutional grade real property, such as a multifamily portfolio, industrial building, or net lease retail asset, and sells beneficial interests to multiple investors, each receiving a pro rata share of the trust's rental income and eventual sale proceeds.

Revenue Ruling 2004-86 established that a properly structured DST interest is treated as a direct interest in real property for tax purposes, making it eligible as 1031 exchange replacement property. To preserve this treatment, a DST must follow strict operating limitations, sometimes referred to as the seven deadly sins, which prohibit the trust from renegotiating existing leases, reinvesting sale proceeds into new property, making new capital improvements beyond routine maintenance, or taking on new borrowing after the offering closes. These restrictions mean DST investors trade some flexibility for the passive, professionally managed structure and the 1031 eligibility.

Because DST interests are securities offerings, they are typically limited to accredited investors and are sold through licensed broker-dealers or registered investment advisors, not directly by a real estate advisory service. An Orange County investor exchanging out of an actively managed rental property into a DST allocation eliminates tenant calls, maintenance decisions, and refinancing responsibilities, while continuing to defer capital gains and depreciation recapture through the exchange. We do not sell securities and any DST allocation would be arranged through an introduction to a licensed provider who can confirm suitability and complete the offering documentation.