“Landlords managing rent-stabilized properties are increasingly recognizing that the economics of active management no longer align with today’s regulatory environment. A 1031 exchange into diversified DST investments lets them preserve capital, defer all capital gains taxes, and finally step into the passive income stability many have wanted for years.”
— Daniel Raupp, Founder & Managing Partner, Fortitude Investment Group LLC
In June 2026, New York City’s Rent Guidelines Board approved a historic two-year rent freeze on roughly 1 million rent-stabilized apartments, effective October 1, 2026, through September 30, 2027. Mayor Zohran Mamdani’s major campaign promise became reality with a 7-1 board vote, marking the first time in RGB history that both one-year and two-year leases received a 0% increase simultaneously. While tenant advocates hailed the decision as critical relief for affordability, landlords and real estate industry experts warned of serious financial consequences for property owners struggling with rising operating costs.
For landlords operating rent-stabilized buildings, the timing presents a significant challenge. According to the RGB’s own research, operating costs for rent-stabilized buildings rose 6.3% between April 2024 and March 2025, nearly double the prior year’s 3.9% increase. Meanwhile, median gross income for these properties declined 9% from 2019 to 2025, with net operating income dropping approximately 13% over the same period. The result: approximately 57,000 rent-stabilized units are currently vacant, many because restoration costs exceed potential rental income under current rent regulations.
Property valuations reflect this pressure. According to recent market data, the average sale price of buildings containing any rent-stabilized units declined from $398,181 in 2019 to $289,478 in 2025, a 28% decrease. For pre-1974 buildings with at least 50% stabilized tenants, average sale prices dropped to just $146,038.
In contrast, owners of 3–5-unit free market buildings in New York City face a different market dynamic. These properties, exempt from rent stabilization, have maintained more stable income streams and continue to appreciate. For owners considering an exit from active property management or concerned about future regulatory changes affecting rental income, market conditions suggest this may be an opportune moment to sell before valuations compress further or additional regulations emerge.
Jeffrey Kiesnoski, Co-Founder and Partner at Fortitude Investment Group, adds: “Since 2006, we’ve helped accredited investors transition from active to passive real estate ownership. The current NYC market presents a unique window. We’re seeing landlords who purchased rent-stabilized buildings decades ago suddenly facing compressed valuations and frozen revenues, yet sitting on substantial equity. A properly structured DST portfolio with debt replacement strategies can not only defer capital gains but preserve generational wealth in ways that continued landlording simply cannot match.”
For landlords holding either rent-stabilized buildings or 3–5 unit free market properties seeking to transition from active landlording to passive wealth building, a 1031 exchange into Delaware Statutory Trusts (DSTs) offers a powerful alternative.
Established under IRS Revenue Ruling 2004-86, DSTs are legal entities that allow accredited investors to own fractional beneficial interests in institutional-grade real estate while achieving complete passive ownership. When a landlord sells rent-stabilized or free market investment property and exchanges proceeds into one or more DST investments, they achieve multiple objectives simultaneously: full capital gains tax deferral, elimination of management responsibilities, access to institutional-quality assets otherwise unavailable to individual investors, and portfolio diversification across property types and geographic markets.
One often-overlooked advantage of DST investing within a 1031 exchange framework is the debt replacement strategy. When a property sale includes existing mortgage debt, that debt must be replaced with new debt or cash in the replacement property to achieve full tax deferral. Many DST investments carry non-recourse debt—meaning lenders have no claim on an investor’s personal assets, only the underlying property.
This structure provides multiple benefits: investors receive the leverage benefits of debt without personal liability, loan terms are typically fixed, and the debt replacement requirement can help satisfy the exchange’s reinvestment requirements. Moreover, the deferred gain carries forward to the replacement property as a reduced cost basis, which ultimately transfers to heirs with a full “step-up” in basis at death—potentially eliminating the deferred tax burden through proper estate planning.
DST investors typically receive distributions from diversified, professionally managed, institutional-quality multifamily, industrial, or net-lease retail properties. More importantly, investors delegate all operational responsibilities to experienced institutional sponsors—trading the demands of active landlording for a passive ownership structure.
If you’re a rent-stabilized or free market property owner in New York considering your options, contact us today or call us at 1-844-437-8103 for a free, confidential property analysis. We’ll show you what a diversified, passive replacement portfolio with integrated estate planning could look like using our proprietary 1031 Exchange Illustrator model.
Download our ebook, theABCs of DSTs to learn more!