capital gains exemption on a primary residence that is owned inside a DST?

[Kat Hughes]

Hello!

My husband and I own a multi family property in Los Angeles.  The front house is 3bed/2bath with a converted garage and the back is a duplex, 2bed/1.5 bath each that are both tenant occupied.  We want to sell the property and we've lived 2 out of the last 5 years to technically be able to claim capital gains exemption for the primary residence part of the property.  I understand we'll have to pay taxes on the investment portion of the sale.  

However, our property is in a DST - Delaware Statutory Trust.

My CPA said that this type of trust is a separate legal entity apart from ourselves as a beneficiary. Even though we are the ultimate beneficiary of the Trust, the ownership of the property is with the Trust the IRS doesn't see us as the owners of the property.  She said that I cannot claim the principal residence exclusion because I didn’t own the property.  

We wanted to do a 1031 exchange for the investment part of the sale but keep the other funds from the primary residence part of the sale because we were thinking we could do a capital gains exemption.

We feel very stuck and when we did the DST, I thought I had gone over all the details of what a DST would mean for us but unfortunately, the company I did it with didn't really disclose this information. I know I should have done more due diligence but being new at that time (this was years ago) to investing, perhaps we didn't know what questions to ask. I know I asked what it would look like if we sold our house later and they said it's an easy process and our property being in a DST won't be an issue.

Any thoughts or advice on this?