The Problem: Rent Control and Compliance Burdens
Owning property in rent-controlled markets can feel like swimming upstream. In tightly regulated areas, landlords face restrictions on how much rents can increase year to year. While these rules are designed to protect tenants, they often leave investors with stagnant income that doesn’t keep pace with inflation or rising expenses.
Add on the headaches of compliance—strict reporting, capped increases, and sometimes tenant protections that make it hard to reposition units—and you have a recipe for lagging returns. Even with steady occupancy, the net operating income may stall out just as maintenance costs rise on aging buildings.
For many investors, a once-promising walk-up apartment building may no longer deliver the financial performance that justified the effort of managing it.
The Solution:
Trade Into Stronger Cash Flow With a 1031 Exchange
Instead of holding onto an underperforming, over regulated asset, investors can use a 1031 Exchange to reposition into stronger opportunities.
By selling a rent-controlled building and deferring capital gains taxes, you can trade into:
- Market-rate properties with room for organic rent growth, or
- Delaware Statutory Trusts (DSTs) that pool investors into sponsor-managed portfolios designed for steady, hands-off income.
DSTs, in particular, offer the ability to diversify into institutional-quality real estate—such as medical office buildings, multifamily complexes, or industrial portfolios—without the day-to-day management burden. This makes them especially appealing to investors looking for stability and predictability.
Real-World Scenario:
Honolulu Walk-Up to Medical Office DST
Imagine an investor holding a mid-century Honolulu walk-up apartment where rent increases are capped. The building needs constant upkeep, and compliance rules continue to tighten.
Through a 1031 Exchange, that investor trades into a medical office DST with long-term leases to health systems. The benefits?
- Predictable income from creditworthy tenants.
- Built-in rent escalations that grow cash flow over time.
- No management responsibilities, since the DST sponsor handles operations.
The end result: stability, diversification, and the potential for better after-tax returns than holding onto the original property.
Key Consideration:
Run the After-Tax Math
Before making any move, it’s crucial to compare your current situation to the after-tax results of selling and reinvesting. A property that looks “fine” on the surface may be holding back your long-term wealth if rent control or compliance burdens keep your net income stagnant.
A qualified intermediary and tax advisor can model different scenarios to ensure you’re making the best move for your financial future.
If you’re holding a rent-controlled property that feels more like a burden than a benefit, now may be the time to explore a 1031 Exchange into DSTs. Contact BridgeWise Group to see how you can move from limited rent growth to stable, tax-advantaged income.
Francein Hansen, 1031 exchange, DST specialist
