When it comes to structuring a 1031 exchange for real estate investors, two passive investment vehicles often come into play: the Delaware Statutory Trust (DST) and Tenants-in-Common (TIC). While both can qualify for 1031 exchange treatment under IRS rules, they differ greatly in terms of structure, legal complexity, investor control, and cost.
What Is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to defer capital gains taxes by reinvesting proceeds from the sale of an investment property into another “like-kind” property. This mechanism is a powerful wealth-building tool, but it comes with strict IRS guidelines regarding timing, ownership, and property qualification.
Eligible Structures: DSTs and TICs
To qualify for a 1031 exchange, the replacement property must be held as real property. Both DSTs and TICs meet this requirement when properly structured:
- Delaware Statutory Trust (DST): Investors hold beneficial interests in a passive trust that owns the real estate.
- Tenants-in-Common (TIC): Investors each hold a direct, undivided ownership interest in the real estate.
Structural Comparison
| Feature | DST | TIC |
| Ownership | Beneficial interest in trust | Direct title ownership |
| Control | Passive (no investor control) | Active (requires unanimous consent for major decisions) |
| Investors Allowed | Up to 499+ | Limited to 35 by IRS guidance |
| Financing | One entity secures financing | Each TIC must qualify individually |
| Management | Centralized trustee | Joint decision-making or hired manager |
Legal and Compliance Considerations
Both structures generally involve the sale of securities, especially when interests are sold to passive investors. That means securities compliance under Regulation D or Regulation A is often required. Here’s how they differ:
| Category | DST | TIC |
| Securities Compliance | Usually required | Usually required |
| Tax Reporting | One K-1 or 1099 to each investor | Each investor reports directly based on their interest |
| State Blue Sky Filings | Sponsor handles | Sponsor handles it for the offering to TIC investors, but the TIC Investors may have their own obligations if they b their own investors. |
| Legal Complexity | Lower – one entity manages compliance | Higher – multiple co-owners increase complexity |
Cost Comparison: Legal and Compliance
| Cost Area | DST | TIC + Syndicate |
| PPM/Offering Docs | $30,000+ | $15,000–$25,000+ (TIC alone=$5k+) |
| Annual Compliance Costs | $10,000–$15,000+ (centralized) | $10,000–$20,000+ (collectively across investors) |
| Financing Coordination | One negotiation | All owners must participate |
DSTs tend to offer lower ongoing legal and compliance costs due to their centralized structure and passive investment model.
Why DSTs Are Often Preferred
- Simplified management
- Passive investor structure
- Scalable for large investor groups
- Easier to manage tax reporting and loan compliance
TICs may still be viable for smaller investment groups who want more control, but they come with greater legal risk and complexity.
However, some properties may not be suitable for the DST structure because of something commonly called “The 7 Deadly Sins of a DST”
To preserve 1031 eligibility, a DST must strictly avoid certain actions — known as the 7 Deadly Sins. These IRS-defined restrictions ensure that the trust remains passive and compliant:
- No new capital contributions after closing the offering
- No renegotiation of existing loan terms
- No new debt acquisition post-closing
- No reinvestment of proceeds after a property sale
- No capital improvements, only routine repairs
- No active business operations within the trust – a separate Master Lease Agreement is generally made on inception of the DST with an Asset Manager, who conducts all business operations
- No new or renegotiated leases, unless pre-authorized
Violating any of these rules could cause the DST to lose its eligibility for 1031 exchange treatment — jeopardizing the tax deferral for all investors.
Final Thoughts
Understanding the differences between DSTs and TICs is essential for structuring 1031 exchanges that are legally compliant and cost-efficient. DSTs offer a streamlined, lower-risk path for passive investors and are generally preferred in syndicated real estate deals. TICs can work well in smaller, controlled groups but demand greater effort and coordination.
Whether you’re an investor or a sponsor, always consult with corporate securities counsel to ensure your 1031 structure is IRS and SEC-compliant and aligns with your ultimate investing goals.
For more guidance on structuring 1031-compliant investment vehicles, visit www.SyndicationAttorneys.com and schedule an appointment with our team today.
