I inherited a California rental I don't want. Should I sell, 1031, or buy into a DST?

An educational overview, not advice. Read the disclosures. They matter.

The short answer, before the detail

If you inherited a California rental and you do not want it, selling can be the right answer more often than the industry will tell you. The step-up in basis usually erases most or all of the gain that built up during the lifetime of the person from whom you inherited property, which means there may be very little tax left to defer. A 1031 exchange or a Delaware Statutory Trust solves a problem you may no longer have.

The three doors are worth comparing, because "usually" is not "always."

Why this decision is different from every other 1031 article you have read

Nearly everything written about 1031 exchanges and DSTs is written for an owner who bought a building decades ago and is sitting on an enormous built-in gain. For that person, deferral is obviously valuable. Selling means writing a very large check.

You are likely not that person.

When you inherit property, your income-tax basis generally resets to the property's fair market value on the date of the previous owner's death. (Source: IRC Section 1014(a)(1); verified in PO-3 fact-check-log, 2026-06-02.) The appreciation that accumulated across your parent's thirty years of ownership can effectively drop out of your taxable gain.

Sell soon after inheriting, at a price near that reset value, and your capital gain can be modest (sometimes close to nothing).

... A 1031 exchange or a DST defers tax. If the step-up already removed the tax, you are deferring very little at real cost. ...

Sit with that, because it inverts the usual advice. A 1031 exchange defers tax. A DST defers tax. If the step-up has already removed most of the tax, you are paying real costs, and accepting real restrictions, to defer an amount that may not justify either.

Nobody who earns a commission on placing you into a DST is likely to lead with that sentence.

Before any of that: how is the property actually held?

Everything above assumed you inherited the property; occasionally, you did not. You inherited a piece of the thing that owns the property, and that changes the answer enough that it belongs first.

Held directly, or in a living trust. The straightforward case, and the one most articles assume. The basis reset described above applies to the property itself.

Held in a single-member LLC. Usually fine, and worth saying plainly because seeing "LLC" on a deed makes people assume the worst. An LLC with one owner that has not elected to be taxed as a corporation is "disregarded" for federal income tax: the IRS looks through it and treats its activity as the owner's own. (Source: 26 CFR 301.7701-2(c)(2).) It generally behaves like direct ownership for both the step-up and a 1031 exchange.

Held in an LLC or partnership with other owners. This is the one that catches people, and it can invert the advice at the top of this page. You inherited a membership interest, not the building. Your interest takes a stepped-up basis. The building's basis inside the partnership does not adjust unless the partnership has a Section 754 election in effect. The statute is blunt about it: the basis of partnership property "shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner" without that election. (Source: 26 U.S.C. Section 743(a); related Section 754.)

The entity can sell the building and report gain measured from the basis it always had. Your step-up sat on the interest and never touched the property. An heir who assumed otherwise can get a tax bill they were told did not exist.

There is a fix. The partnership can make the Section 754 election. It is the partnership's election not yours, though, and elections have deadlines.

Held in an S corporation. Same shape, fewer exits. Inherited stock takes a stepped-up basis in the stock. There is no Section 754 equivalent for an S corporation, so the corporation's basis in the real estate does not adjust. (Source: IRC Section 1367 and IRS guidance on S corporation stock and debt basis.) If this is your situation, this is an immediate conversation with a CPA or tax attorney before you do anything else, including reading further. Connect with us if you need a referral. We have some excellent firms that have guided families through this situation.

Get connected with the right CPA or attorney for your situation

One more, specific to California. If the property was community property of your parents and one of them died earlier, the basis may already have reset once, on both halves rather than only the half the first parent owned. (Source: 26 U.S.C. Section 1014(b)(6).) That does not change your own step-up. It changes what the property's basis was before you got there, which is exactly the number the rest of this page depends on.

The bright line: anything other than an individual or a living trust means call a CPA or tax attorney first

That is a rule, not a guideline, and it is worth more than the detail above.

If your parent held the property in their own name or in a living trust, the ordinary rules in this article apply and you can work the rest of the page normally. If title sits anywhere else, a partnership, a multi-member LLC, a S corporation, or a C corporation, stop and involve a CPA before you make any decision, including the decision to list it.

The cases above are why. Each one puts the step-up somewhere other than the building: on a membership interest, on stock, or nowhere useful at all without an election the partnership has to make. Each has a different fix, and some of the fixes have deadlines. A single-member LLC is the reassuring exception, because it is disregarded and generally behaves like direct ownership, though it is still worth confirming rather than assuming.

The facts that decide, are not something you can easily deduce. They require specific knowledge and the ability to apply that knowledge to paperwork. They live in the deed, the operating agreement, the entity's tax returns, and in whether an election nobody ever mentioned to you was filed years ago.

No web page can tell you which of these you are in, including this one. What a page like this can do is tell you the question exists and who to ask, so you ask it before rather than after.

And why the order matters: fiduciary first, then the strategy

This is the practical argument for starting with a fiduciary rather than with a product.

An advisor (financial and/or legal) who is paid the same regardless of which door you choose has no reason to skip this question. An advisor compensated on placing you into a DST has every reason to get to the DST conversation quickly, and the title question is a slow step that sometimes ends with "there is nothing here to defer."

So use it as a test. If someone recommends a 1031 or a DST before asking how title is held, they are guessing, and often they are guessing in the direction that pays them. A fiduciary owes you the analysis first. Your CPA confirms the structure, your advisor sizes the decision, and the strategy is the last thing chosen rather than the first thing sold.

The clock nobody mentions

Here is the part that is genuinely absent from the advice California heirs are given, and it is the reason "I will decide later" is not free.

Three things move against each other from the day you inherit.

Your basis reset is a one-time event, and it is dated. It is fixed to the date of death. Every dollar the property appreciates after that date is a new taxable gain that belongs to you, not to the estate. The step-up shrinks as the market moves.

Your carrying cost may have already jumped. California's Proposition 19, operative for transfers on or after February 16, 2021, sharply narrowed the old parent-to-child exclusion from property-tax reassessment. It no longer covers investment property. (Source: California State Board of Equalization, Proposition 19; verified 2026-06-02 and confirmed 2026-07-03.) Your parent may have been paying property tax on a decades-old assessed value. You may be paying on today's. The math that made this a good rental for them can quietly fail for you.

A fresh recapture meter starts running. If you keep the property and depreciate it, that new depreciation can be recaptured when you eventually sell, taxed at a federal rate of up to 25%. (Source: depreciation recapture under IRC Section 1250, 25% cap; verified in PO-3 fact-check-log.) In one of our worked examples, an inherited duplex held for eight years after inheritance still generated roughly $81,000 of recapture. (Source: worked-examples Scenario B; verified in PO-3 fact-check-log, 2026-05-26 / 2026-06-01.)

So waiting costs you in three directions at once: the clean exit window narrows, the carrying cost is higher than it was for your parent, and you are building a new tax liability the whole time you delay.

That does not mean sell tomorrow. It means the decision to delay has a cost, and the cost is not zero.

Door 1: sell it

The path most heirs assume is the expensive one, and it frequently is not.

It fits when the property is near its stepped-up value, you do not want to be a landlord, and you would rather have liquid money than real estate.

What it costs. Whatever gain has accrued since the date of death, plus recapture on depreciation you have taken since inheriting. California taxes capital gain as ordinary income at rates up to 13.3%, and the state applies a withholding requirement on real-estate sales via FTB Form 593. (Sources: California rate treatment and Form 593 withholding; both verified in PO-3 fact-check-log.)

The honest downside. You are out of real estate. If the rental income mattered to your household, it stops. And if the property is genuinely a good asset in a good location, selling to escape the hassle is a real trade, not a free one.

Run the number before you assume. Our California tax calculator applies the step-up and shows what a sale actually costs.

Door 2: a 1031 exchange into another property

It fits when the property has appreciated meaningfully since you inherited it, you want to stay in real estate, and you are willing to be a landlord again somewhere else.

What it requires. A 1031 is not a slow decision. You have 45 days from closing to identify replacement property and 180 days to close, and the proceeds must run through a qualified intermediary rather than your own bank account. (Source: 1031 identification and exchange windows; verified in PO-3 fact-check-log.) Miss a deadline and the exchange fails, which turns a deferral into a sale you did not plan for.

The honest downside. You have exchanged a rental you did not want for a different rental you now have to run. If the reason you are here is that you never wanted to be a landlord, a 1031 into another building does not solve that.

Financing is where these fail most often. We wrote about that separately in did financing kill your 1031 deal?.

Door 3: a Delaware Statutory Trust

A DST is a way to hold a fractional interest in institutional real estate without managing anything. It can serve as replacement property in a 1031 exchange, which is why it comes up for heirs who want out of the landlord role without triggering the tax.

It fits when there is a real gain worth deferring, you want to stay invested in real estate, and you specifically do not want to operate a building.

What it costs, stated plainly. DSTs are illiquid. There is no public market and no simple way out if you change your mind. They are generally sold as private placements to accredited investors only, which means not everyone qualifies. (Source: DST eligibility as 1031 replacement property, Revenue Ruling 2004-86, and the accredited-investor and private-placement structure; verified in PO-3 fact-check-log.) You give up control entirely: you do not choose tenants, you do not decide when to sell, and you do not set the business plan.

The honest downside, and it is the one that matters for heirs. If your step-up already erased the gain, a DST locks up your capital, for years, to defer a tax that may be small. That is a bad trade dressed as a sophisticated one. The people most likely to recommend it to you are the people paid to place it.

We are not. We charge an advisory fee and earn no commission on a DST placement, which is why we can write that paragraph.

How to actually choose

Work it in this order. It takes ten minutes and it eliminates most of the confusion.

First, find out how title is actually held. Everything else on this page depends on the answer, for the reasons above. Held directly or in a living trust, or in a single-member LLC, and the ordinary rules apply. Held in a partnership, a multi-member LLC or an S corporation, and what you inherited is an interest in an entity rather than a building, which is a different question with a different answer. The deed and the entity's last tax return usually settle it quickly. Do this before the arithmetic, because getting it wrong makes every number after it wrong.

Second, find the gap. What is the property worth today, and what was it worth on the date of death? That difference, not the price your parent paid, is roughly what is on the table.

If the gap is small, the deferral tools are solving a problem you do not have. Selling is probably your answer, and the tax bill is probably smaller than you have been braced for.

If the gap is large, either because the market moved or because years have passed since the death, then deferral starts earning its keep, and the real question becomes the second one.

Third, answer honestly: do you ever want to manage property again? If yes, a 1031 into something you actually want is on the table. If no, the DST is the door that matches the answer, subject to the eligibility and illiquidity trade-offs above.

Fourth, check whether you are leaving California. California does not forget a deferred California gain. If you 1031 into an out-of-state property, the state still requires annual reporting on FTB Form 3840 and taxes that gain when you eventually sell, even if you have moved away. (Source: FTB 2025 Form 3840 Instructions; verified in PO-3 fact-check-log, 2026-05-26.)

The decision tree walks these same questions and narrows the doors to the one or two worth a real conversation.

Frequently asked

Does the step-up mean I owe no tax at all if I sell? Not necessarily. It resets your basis to the date-of-death value, so gain accrued before that date largely drops out. Any appreciation since then is taxable, as is recapture on depreciation you have taken since inheriting.

Do I have to pay back the depreciation my parent took? Generally no. The recapture rule for depreciable real property does not apply to a transfer at death, so your parent's accumulated depreciation is not recaptured against you, and the meter starts fresh from your stepped-up basis. (Source: 26 U.S.C. Section 1250(d)(2), "Transfers at death.") The statute carves out one exception, for income in respect of a decedent under Section 691, which is narrow and fact-specific. It is worth one question to your CPA rather than an assumption either way. And if the property sits inside a partnership or an S corporation, see the section above first, because the basis question changes.

Can I do a 1031 on a property I just inherited? The property has to be held for investment or business use. An inherited rental that continues as a rental generally fits that description, while a property you move into does not. The facts matter here more than the label.

Is Prop 19 a capital-gains issue? No, and conflating the two is the most common error in this area. Prop 19 governs property-tax reassessment, which is your annual carrying cost. Capital gains and the step-up are income tax. They are separate systems that happen to collide on the same decision.

What if I own it with siblings? Then the decision is partly a negotiation, and 1031 exchanges get complicated when co-owners want different outcomes. Raise it early rather than at day 40 of a 45-day identification window.

Estate Planning disclosure. Material prepared herein has been created for informational purposes only and should not be considered investment, tax, or legal advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy.

Estate planning involves complex legal and tax considerations that vary significantly based on individual circumstances and the laws of the applicable jurisdiction. Federal and state estate, gift, and generation-skipping transfer tax laws under the Internal Revenue Code (IRC) and applicable state statutes are subject to change, including scheduled sunset provisions that may alter exemption amounts and tax rates. The strategies discussed may not be suitable for all individuals, and their effectiveness depends on factors unique to each person's situation. Savvy Advisors Inc. does not provide legal advice or prepare legal documents. It is the responsibility of individuals to verify their own circumstances. Investors should consult their own qualified estate planning attorney, tax professional, and financial advisor before implementing any estate planning strategy.

Trust & Corporate Structures disclosure. Material prepared herein has been created for informational purposes only and should not be considered investment, tax, or legal advice or a recommendation to establish any particular trust, business entity, or corporate structure. Information was obtained from sources believed to be reliable but was not verified for accuracy.

The formation, administration, and taxation of trusts and corporate or business entities involve complex legal and tax considerations that vary based on individual circumstances, entity type, and the laws of the applicable jurisdiction. Federal tax treatment under the Internal Revenue Code (IRC), as well as applicable state laws governing entity formation and fiduciary obligations, are subject to change and to differing interpretation. The appropriateness of any trust or corporate structure depends on factors unique to each person's situation, and there is no guarantee that any anticipated legal protection or tax treatment will be realized. Savvy Advisors Inc. does not provide legal advice or prepare legal documents. It is the responsibility of individuals to verify their own taxation and legal obligations. Investors should consult their own qualified attorney, tax professional, and financial advisor before establishing or modifying any trust or corporate structure.

Important Disclosure Regarding Delaware Statutory Trust (DST) Investments

Delaware Statutory Trust ("DST") investments are generally offered through private placement offerings and are intended only for investors who satisfy the eligibility requirements established by the issuer and applicable securities laws. In many cases, DST offerings are available only to investors who qualify as accredited investors.

DST investments are not suitable for all investors. They are generally illiquid, are not listed on a public exchange, and involve investment risks, including the possible loss of principal. Investment objectives, risks, fees, expenses, tax considerations, and offering terms vary by investment and should be carefully reviewed before investing.

Nothing in this material constitutes an offer to sell or a solicitation of an offer to buy any specific DST investment. Any offer may be made only by means of the applicable private placement memorandum and other offering documents. Investors should carefully review these materials and consult with their legal, tax, and financial advisors to determine whether a DST investment is appropriate in light of their individual circumstances.

1031 Exchange Disclosure: DST investments are often used as replacement property in connection with Section 1031 like-kind exchanges. Investors should consult with their qualified tax advisor regarding the tax consequences and eligibility requirements associated with a 1031 exchange. Neither this material nor the adviser provides legal or tax advice.

Why work with us, and how to judge anyone you'd trust with this

An inherited property you do not want is exactly the moment people get sold something. Before you hand anyone this decision, ask four questions. Here is how we answer them.

1. How are you paid? We are fee-based. We charge an advisory fee for the analysis and the plan, and we earn no commission on DST placements, so we are not paid more when you choose one door over another.

2. Are you a fiduciary? Yes. Advisory services run through Savvy Advisors, an SEC-registered investment adviser, which carries a legal duty to act in your interest, not merely to recommend something "suitable."

3. Do you actually specialize in this? I hold a Series 65 license; I have spent more than a decade working specifically on 1031 and DST transactions. Real estate is in my family, so the stakes here are not abstract to me.

4. Will you give me the answer you can't sell? This page is the test. The most likely right answer for a California heir is "sell it, the step-up already did the work," and that is the answer that pays us least. We said it first and put it at the top.

If an advisor cannot answer those four cleanly, keep looking. If you want to walk your own numbers with someone who can, that is a conversation, not a sales pitch.

For the wider picture of what inheriting a California rental does to your taxes, start with inherited a rental in California: Prop 19 and capital gains.

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