Delaware Statutory Trust (DST) vs. Syndication: Options for 1031 Exchange Investors
Troy Buckholdt
If you're selling a property and want to defer taxes with a 1031 exchange, you generally can't exchange into a typical real estate syndication, because an interest in a partnership or LLC isn't treated as real property for 1031 purposes. A Delaware statutory trust (DST) is different: under an IRS ruling, a DST interest can count as a direct interest in real estate. The trade-off is that a DST is rigid by design. It can't raise new money, refinance or do major renovations, while a syndication can.
Why can't you 1031 into a syndication?
Section 1031 covers real property "exchanged solely for real property of like kind." Treasury regulations say an interest in a partnership isn't real property for this purpose, unless the partnership has elected out of partnership tax rules. In a typical syndication, investors buy membership interests in an LLC taxed as a partnership, so those interests don't qualify.
What is a Delaware statutory trust?
A DST is a trust that holds title to real estate, with investors owning beneficial interests in it. In Revenue Ruling 2004-86, the IRS said a taxpayer "may exchange real property for an interest in the Delaware statutory trust" without recognizing gain, if the other 1031 rules are met.
To keep that treatment, the trustee's powers are tightly limited. Under the ruling, the trustee can't:
- Accept new capital contributions.
- Renegotiate or refinance the loan.
- Renegotiate leases or take on new tenants, except if a tenant goes bankrupt or becomes insolvent.
- Reinvest sale proceeds or buy replacement property.
- Make more than minor non-structural changes, unless required by law.
- Invest cash other than in short-term government obligations or similar instruments.
- Otherwise vary the investment.
The trust also has to distribute all available cash, less reasonable reserves, every quarter. Industry sources often call these limits the seven prohibitions.
DST vs. syndication vs. tenancy-in-common
| Topic | DST | Syndication (LLC) | Tenancy-in-common (TIC) |
|---|---|---|---|
| 1031 replacement property? | Yes, if structured under Rev. Rul. 2004-86 | Generally no | Can be, if structured properly |
| Investors | Accredited, typically | Accredited, plus some non-accredited in 506(b) | Up to 35 co-owners under IRS ruling guidelines |
| Can refinance or renovate? | No | Yes, per the operating agreement | Sales, leases and refinancing need unanimous approval; other decisions can be by majority |
| New money from investors | Not allowed | Possible, including capital calls | Limited |
| Control | Trustee and sponsor, with tight limits | Sponsor | Co-owners share major decisions |
| Best fit | Stable, leased property | Value-add or business plans that need flexibility | Small groups of active co-owners |
The 1031 timeline
- 45 days after you sell, you must identify replacement property in writing.
- 180 days after you sell, or by your tax return due date (including extensions) if that's earlier, you must receive it. If you sell late in the year, filing an extension can protect the full 180 days.
- A qualified intermediary holds the sale proceeds. The IRS says related parties and your agents aren't eligible.
Because a DST is already packaged, some investors identify one as a backup in case their main replacement property falls through.
What do DSTs cost?
DST offerings are usually private placements under Regulation D, open only to accredited investors and sold through broker-dealers. Industry sources put broker-dealer commissions at about 5% to 7% and total upfront costs often above 10% of investor equity, plus ongoing asset management fees. Minimums for 1031 investors are often around $100,000. Interests are illiquid, and In 2005, NASD, now FINRA, warned that similar 1031 tenancy-in-common interests are "illiquid securities."
What about "drop and swap"?
Some partnerships try to give each partner a 1031 option by deeding the property out to partners as tenancy-in-common interests before a sale, so each partner can exchange or cash out. It's risky. If the deed-out happens after a buyer is lined up, the IRS can treat the partnership as the real seller. Get a tax adviser involved well before any sale.
Taxes later: deferral, not forgiveness
- Your basis carries over. The replacement property generally takes the same basis as the property you sold, adjusted for any cash or gain recognized.
- Recapture can still apply. The IRS notes some gain may be recaptured as ordinary income in certain exchanges.
- Step-up at death. Heirs generally take a basis equal to fair market value at the date of death, which can erase deferred gain.
Where DoorRaise fits
DoorRaise deals are LLC interests in apartment syndications, so they generally aren't 1031 replacement property. If you're investing proceeds from a recent sale, talk to your qualified intermediary and tax adviser before you commit. See the accredited investor definition and how to vet a syndication.
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FAQ
Can I do a 1031 exchange into a real estate syndication?
Generally no. LLC and partnership interests aren't real property for 1031 purposes. A DST or a properly structured TIC interest can qualify.
Who can invest in a DST?
Most DSTs are Regulation D private placements open only to accredited investors.
Can a DST refinance or renovate the property?
No. Under Revenue Ruling 2004-86, the trustee can't refinance, accept new capital or make more than minor non-structural changes.
Does a 1031 exchange eliminate taxes?
No. It defers them. Your basis carries over, and the deferred gain can be taxed when you eventually sell without exchanging.
How long do I have to complete a 1031 exchange?
45 days to identify replacement property and 180 days to close, or your tax return due date (including extensions) if that comes first.
Sources
- 26 U.S.C. 1031
- 26 CFR 1.1031(a)-3 (definition of real property)
- IRS Rev. Rul. 2004-86
- IRS Rev. Proc. 2002-22 (tenancy-in-common)
- IRS, Form 8824 instructions
- 26 U.S.C. 1014 (basis at death)
- FINRA (NASD) Notice to Members 05-18
- CliftonLarsonAllen, drop and swap risks (2026)
- Investment Grade, DST fees (2026)
- Asset Strategy, DST overview
This post is general information, not tax, legal or investment advice. Talk to a qualified intermediary and tax adviser before any 1031 exchange. DoorRaise is not a broker-dealer, investment adviser or funding portal.