DST vs TIC: Comparing 1031 Exchange Ownership Structures
Delaware Statutory Trusts (DSTs) and Tenants-in-Common (TIC) arrangements are the two fractional-ownership structures that let 1031 exchange investors own larger, professionally managed real estate alongside others. Both can qualify as a direct interest in real estate for a like-kind exchange, but they differ in who holds title, who decides, who signs for the debt, and how many investors can participate.
The short answer
A TIC gives you deeded title and a vote. A DST gives you no title and no vote, and in exchange removes every coordination problem that comes with co-owners. If you want control, a TIC is the only one of the two that offers any. If you want a passive interest, with no day-to-day management, that can be identified inside a 45-day window without negotiating with anyone, a DST is the structure built for it. That trade is a large part of why DSTs are now more widely used than TICs for fractional 1031 ownership.
| Factor | DST (Delaware Statutory Trust) | TIC (Tenants in Common) |
|---|---|---|
| IRS 1031 treatment | Beneficial interest treated as a direct interest in real estate (Rev. Rul. 2004-86). | Undivided fractional interest treated as direct real estate (Rev. Proc. 2002-22). |
| Number of investors | No statutory limit, commonly many investors, which enables lower minimums. | Limited to 35 co-owners under Rev. Proc. 2002-22. |
| Title and control | The trust holds title. Investors hold passive beneficial interests and do not vote on operations. | Each investor holds direct deeded title and votes on major decisions. |
| Decision-making | The signatory trustee decides, inside seven fixed restrictions. Investors have no day-to-day authority. | Major decisions typically require unanimous or majority co-owner consent, which can deadlock. |
| Financing | The trust is the single borrower on non-recourse debt. Investors do not personally qualify for or sign the loan. | Lenders may underwrite multiple co-owners, and financing more than one owner is more complex. |
| Liability | Investor liability is generally limited to the amount invested, which can itself be lost. | Each co-owner carries more direct exposure as a titled owner. |
| Typical minimum | Often lower, because interests are spread across more investors. | Often higher, given the 35-owner cap. |
| Speed to close | Usually fast. The sponsor has already acquired and financed the property before the offering. | Slower. Co-owners and the lender must be assembled and aligned. |
| Exit | The sponsor sells and distributes proceeds. Investors do not control timing. | A co-owner can generally sell an interest, but a buyer for a fractional deed is hard to find. |
| Prevalence today | Widely used for fractional 1031 replacement property since 2004. | Used less often after co-owner and financing frictions during the 2008 to 2009 downturn. |
How each one is treated by the IRS
The two structures reached 1031 eligibility by different routes, and the difference still matters.
TIC, Revenue Procedure 2002-22. Issued in 2002, this is not a ruling that a taxpayer can simply rely on. It sets out 15 conditions the IRS will look for before it will consider issuing a private letter ruling that an undivided fractional interest is an interest in real property rather than an interest in a business entity. In practice the industry treats the 15 conditions as a safe harbor and structures to them, because a co-ownership that looks like a partnership is a partnership, and a partnership interest is not real property and does not qualify under Section 1031.
DST, Revenue Ruling 2004-86. Issued in 2004, this is a ruling of general applicability. It holds that where a Delaware Statutory Trust's trustee has only limited powers and cannot vary the investment, each beneficial owner is treated as owning an undivided fractional interest in the underlying real estate directly. Any taxpayer whose facts match can rely on it without asking the IRS for anything. That difference in certainty is one reason sponsors moved to the DST structure so quickly.
The conditions that shape a TIC
Several of the 15 conditions in Rev. Proc. 2002-22 are administrative, but these directly determine what owning a TIC interest feels like.
- No more than 35 co-owners may hold interests in the property.
- The co-owners must not file a partnership tax return, hold themselves out as a partnership, or conduct business under a common name.
- Each co-owner must hold title as a tenant in common under local law, with an undivided fractional interest.
- Sale, lease, refinancing or a hazardous-substance decision requires the unanimous approval of all co-owners.
- Each co-owner must have the right to transfer, partition or encumber their own interest without the consent of the others.
- Proceeds and debt must be shared in proportion to each co-owner's interest.
- Any management or brokerage agreement must be renewable annually, and management fees must not depend on the property's income or profits.
The fourth is the one that causes the most difficulty in practice. Unanimous approval among up to 35 separately titled owners is straightforward when a property is performing and nothing needs deciding. It becomes very hard when a loan is maturing, a major tenant leaves, or a sale is on the table, which is precisely when a decision cannot wait.
The restrictions that shape a DST
A DST has the opposite problem. There is exactly one decision-maker, so nothing deadlocks, but that decision-maker is fenced in by the seven prohibitions of Rev. Rul. 2004-86. The trust cannot accept new capital after closing, cannot refinance or renegotiate its debt, cannot reinvest sale proceeds, cannot make capital expenditures beyond normal repairs and legally required work, must hold reserves only in short-term debt obligations, must distribute all cash beyond necessary reserves, and cannot enter new leases or renegotiate existing ones. The leasing restriction has a narrow exception for tenant bankruptcy or insolvency. The DST page covers each restriction in detail.
Where those restrictions block a necessary action, many trust agreements permit conversion to a springing LLC. The asset is preserved, but the resulting interest is a partnership interest, and partnership interests do not qualify under Section 1031. This is the specific structural risk a DST carries that a TIC does not.
Why the market moved from TIC to DST
TICs were the dominant fractional 1031 vehicle through the mid-2000s. The 2008 to 2009 downturn exposed the structure's coordination cost. Properties that needed a loan modification, a recapitalization, or a fast sale required unanimous agreement from co-owners whose individual circumstances had diverged sharply, and lenders who had underwritten each owner separately now had to renegotiate with each of them. Many TICs stalled. DSTs, with a single borrower on non-recourse debt and a single signatory trustee, were far easier to work out, and sponsors and broker-dealers largely rebuilt around the DST after that. The 2004 ruling made the structure possible; 2008 made it the default.
Which structure fits which investor
A DST tends to fit an investor who
- Wants a passive interest, with no day-to-day management and no operating role at all.
- Is inside a 45-day identification window and wants a property the sponsor has already acquired.
- Cannot or does not want to personally qualify for a loan.
- Has a smaller amount to place, or a residual amount that would otherwise be taxable boot.
- Wants to spread an exchange across several properties or markets.
- Needs a backup identification in case a primary purchase collapses.
A TIC tends to fit an investor who
- Wants deeded title in their own name.
- Wants a vote on a sale, a refinancing, or a major lease.
- Is comfortable coordinating with a small group of co-owners.
- Is investing a large enough amount to be meaningful within a 35-owner cap.
- Values the ability to transfer or encumber their own interest independently.
Both are illiquid, both depend on the underlying real estate, and neither assures income or the return of capital. Which one is appropriate depends on your exchange, your timeline, and your circumstances, and that is a conversation to have with your own tax and legal advisors before you identify. To talk it through, book a call with Toni.
DST interests are offered only by private placement memorandum to accredited investors. They are speculative and illiquid, distributions are not guaranteed, fees reduce returns, and investors can lose some or all of their investment.
DST and TIC questions, answered
What is the difference between a DST and a TIC?
In a Tenants-in-Common (TIC) structure each investor holds direct deeded title to a fractional share of the property and votes on major decisions. In a Delaware Statutory Trust (DST) the trust holds title and investors own passive beneficial interests with no management authority. Both can qualify as a direct interest in real estate for a 1031 exchange when properly structured, but a DST allows more investors, generally lower minimums, and simpler financing.
Are DSTs and TICs both eligible for a 1031 exchange?
Generally yes, when properly structured. A TIC interest is addressed by IRS Revenue Procedure 2002-22 and a DST beneficial interest by IRS Revenue Ruling 2004-86, so an investor can use either to defer capital gains in a like-kind exchange when all other 1031 requirements are met. The two authorities are different in kind: Rev. Proc. 2002-22 sets out the conditions under which the IRS will consider a private letter ruling request, while Rev. Rul. 2004-86 is a ruling of general applicability that any taxpayer with matching facts can rely on.
How many investors can a TIC have?
Rev. Proc. 2002-22 limits a TIC to 35 co-owners. A husband and wife holding jointly count as one co-owner for this purpose. A DST has no statutory limit on the number of investors, which is one reason DSTs typically offer lower minimum investments.
Why have DSTs become more common than TICs?
DSTs place financing on the trust rather than on individual investors, do not face the unanimous-consent deadlocks that can affect TICs, and allow more investors at lower minimums. During the 2008 to 2009 downturn many TICs needed a loan modification or workout, and getting unanimous agreement from up to 35 separately titled owners, each of whom the lender also had to underwrite, proved slow and in some cases impossible. DSTs, with one borrower and one decision-maker, were easier to work out and became more widely used afterward.
Can a DST investor vote on selling the property?
No. Revenue Ruling 2004-86 requires the trustee's powers to be limited and the investment not to vary, and giving beneficial owners operating authority would fail that test. The trade-off is deliberate: an investor accepts no control in exchange for a structure that can qualify for 1031 treatment while remaining passive.
Is a TIC riskier than a DST?
They carry different risks rather than more or less of the same risk. A TIC investor holds deeded title, which means direct exposure as an owner and reliance on co-owners to agree on major decisions. A DST investor gives up all control and depends entirely on the sponsor's judgment, and the trust cannot refinance or re-lease its way out of a problem because of the seven restrictions. Both are illiquid and both can lose value.
What is a springing LLC?
A springing LLC is a provision in many DST trust agreements allowing the trustee to convert the trust into a limited liability company if the property faces a problem the seven restrictions of Rev. Rul. 2004-86 prevent it from solving, such as a needed refinancing or a major re-leasing. The conversion protects the asset, but the resulting LLC interest is a partnership interest, which is not real property for Section 1031 purposes, so 1031 eligibility for that interest ends. It is worth asking any sponsor how they have used this provision historically.
Can I exchange from a TIC into a DST?
Generally yes, if the TIC interest was structured as an undivided fractional interest in real property rather than as a partnership interest. Because both are treated as direct interests in real estate, a properly structured TIC interest can be relinquished and exchanged into a DST interest, subject to the same 45-day and 180-day deadlines and the other Section 1031 requirements.
Sources
- IRS Revenue Ruling 2004-86, 2004-33 I.R.B. 191, on Delaware Statutory Trust beneficial interests under Section 1031.
- IRS Revenue Procedure 2002-22, 2002-1 C.B. 733, on undivided fractional interests in rental real property.
- Internal Revenue Code Section 1031, which since 2018 applies only to real property.
- Delaware Statutory Trust Act, 12 Del. C. 3801 et seq.