“If you don’t find a way to make money while you sleep, you will work until you die.”
— Warren Buffett
If you’ve sold an investment property and are looking for a hands-off way to reinvest while deferring capital gains taxes, you may be wondering:
Can I complete a 1031 exchange into a real estate syndication or a DST (Delaware Statutory Trust)?
The answer is — it depends. While real estate syndications are popular among passive investors, not all syndications qualify under IRS rules for a 1031 exchange. However, DSTs do, and they can be a powerful tool when structured correctly.
In this post, we’ll break down the difference between syndications and DSTs, how each interacts with 1031 exchange rules, and what you need to know before attempting to roll your proceeds into either option.
1031 Exchange Basics (Quick Refresher)
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows you to defer capital gains tax when you sell an investment property — as long as you reinvest the proceeds into another like-kind property within strict timeframes (45 days to identify, 180 days to close).
The replacement property must be:
- Held for investment or business use
- Like-kind (real property for real property)
- Titled in the same name as the relinquished property
So how do syndications and DSTs fit into this?
Can You Do a 1031 Exchange Into a Real Estate Syndication?
Usually not.
Most real estate syndications involve buying a membership interest in an LLC or a partnership interest, rather than directly owning real property. The IRS considers this a transfer of personal property, which does not qualify as like-kind for 1031 purposes.
Why Syndications Typically Don’t Qualify:
- Investors receive a security interest, not deeded real estate.
- The IRS has long held that partnership interests are excluded under Section 1031 (see IRC §1031(a)(2)(D)).
- You can’t exchange real property for a partnership interest and still qualify for tax deferral.
That said, some syndication sponsors have created 1031-friendly structures, such as Tenancy-in-Common (TIC) offerings or DSTs, which we’ll now explore.
Example: How a DST Helped One Investor Defer Taxes and Retire
Meet Lisa, a 64-year-old landlord in Maryland. She owned a four-unit rental property in Annapolis for nearly 20 years. When a buyer offered her $925,000, she saw a golden opportunity to retire — but selling outright would trigger over $150,000 in capital gains taxes.
Lisa wanted passive income without the headaches of managing tenants or another property. Her tax advisor introduced her to a Delaware Statutory Trust (DST) offering: a 200-unit multifamily property managed by a national sponsor. She completed a 1031 exchange into the DST, avoided immediate capital gains taxes, and now receives monthly income — without ever lifting a wrench.
Her words: “I traded tenants for time with my grandkids.”
Delaware Statutory Trusts (DSTs): The 1031 Exchange-Friendly Option
A Delaware Statutory Trust is a legal entity that owns income-producing real estate (like multifamily buildings, medical offices, or industrial facilities). Individual investors purchase beneficial interests in the trust — and for 1031 purposes, the IRS treats these interests as direct ownership in real property.
Why DSTs Qualify for 1031 Exchanges:
- IRS Revenue Ruling 2004-86 explicitly allows DST interests to qualify as “like-kind” property.
- The trust holds title to real estate, and investors receive fractional ownership interests that meet IRS standards.
- Investors do not have voting control, which maintains the passive nature of the investment.
Common Benefits of Using a DST in a 1031:
- Diversification: Access to large, institutional-grade real estate.
- No Landlord Duties: Sponsors handle all property management.
- Low Minimums: Many DSTs have minimum investments as low as $100,000.
- Timeline Flexibility: DSTs can be used as primary or backup identification options within the 45-day window.
Key Differences: Syndication vs. DST
| Feature | Real Estate Syndication | Delaware Statutory Trust (DST) |
|---|---|---|
| Ownership Type | Partnership Interest | Direct Real Estate Interest |
| 1031 Eligible? | ❌ Generally not | ✅ Yes |
| Control | Voting rights | No control (passive) |
| Minimum Investment | Varies | Usually $100k+ |
| Management | Varies | Fully managed by sponsor |
| IRS Approval | No formal guidance | Revenue Ruling 2004-86 |
Risks and Considerations
While DSTs are a compliant and increasingly popular 1031 strategy, they’re not without risk:
- Illiquidity: You typically hold the DST interest for 5–10 years.
- Lack of Control: Investors cannot vote or influence property decisions.
- Sponsor Risk: The quality of the sponsor matters — choose a reputable firm with a track record.
- Limited Customization: You can’t negotiate terms like in a traditional real estate deal.
Always consult a qualified intermediary, tax advisor, and legal counsel before using a DST in your exchange.
Final Thoughts: Passive Income, Deferred Taxes, and Smart Investing
“In the middle of difficulty lies opportunity.”
— Albert Einstein
The 1031 exchange isn’t just about tax deferral — it’s about strategic portfolio building. While traditional syndications don’t qualify, DSTs offer a compliant, turnkey solution that gives investors the ability to roll over gains into high-quality real estate with none of the landlord stress.
For landlords looking to retire, diversify, or simplify their holdings, a Delaware Statutory Trust might be the perfect next move.
Have questions about using a DST in your 1031 exchange?
Our team at [Your Company Name] works closely with clients, qualified intermediaries, and DST sponsors to ensure smooth, compliant, and strategic exchanges.
📞 Contact us today to learn more about how we can support your 1031 exchange — whether traditional or DST-based.
