The short answer
Often yes, provided the trust is built the way Rev. Rul. 2004-86 describes and the group is a true co-ownership rather than a partnership. The ruling treats each beneficial owner of a properly limited Delaware statutory trust as owning an undivided fractional interest in the trust's real estate, and says the result is the same when co-owners 'immediately form DST by contributing their interests' in the property. The hard part is practical: the loan and the lease have to be settled before the trust starts, because the trustee may not refinance, re-lease or take new money afterwards, and every co-owner has to deed its own share into the trust.
At a glance
| Governing ruling | Rev. Rul. 2004-86, which classifies a properly limited DST as a trust whose owners hold the real estate |
|---|---|
| Co-owners contributing property | The ruling says the outcome is unchanged when owners form the trust by contributing their interests |
| What each owner holds afterwards | For income tax purposes, an undivided fractional interest in the same building |
| Loan and lease | Must be in place before the trust starts; the trustee cannot renegotiate or refinance the debt |
| New money after formation | Not allowed; the trustee may not accept additional contributions |
| Formation under Delaware law | A certificate of trust filed with the Delaware Secretary of State |
| Who has to sign | Every co-owner deeds its own undivided share; a holdout must sell out or stay outside the plan |
| Groups that file Form 1065 | Own partnership interests and need to restructure before any conversion |
The ruling that approves DSTs already describes co-owners forming one with their own property
Rev. Rul. 2004-86 holds that a Delaware statutory trust whose trustee can only collect and distribute income is an investment trust, classified as a trust. Each beneficial owner is treated as the owner of an aliquot portion of the trust, and because the owner of an undivided fractional interest of a grantor trust is considered to own the assets behind it, each is considered to own an undivided fractional interest in the building itself.
The ruling's facts have two investors buying interests from the founder, but it then adds the sentence that matters to a TIC: because the trust is a grantor trust, 'the outcome to the parties will remain the same' if the founder transfers interests in the property directly to them and they 'immediately form DST by contributing their interests.' A co-owner who deeds a 25 percent tenancy-in-common share into a trust and receives a 25 percent beneficial interest is, for income tax purposes, holding the same fraction of the same real estate.
Delaware law supplies the vehicle. Under title 12, chapter 38 of the Delaware Code, a statutory trust is formed by filing a certificate of trust with the Secretary of State, and section 3805 gives each beneficial owner an undivided beneficial interest in the trust property, sharing profits and losses in proportion to that interest unless the governing instrument says otherwise.
The trust has to start with its financing and its tenant already fixed
In the ruling the founder borrowed on a 10-year nonrecourse note and signed a 10-year net lease before contributing the property, and the trust assumed both. The IRS relied on that order: the financing and leasing arrangements 'made prior to the inception of DST are fixed for the entire life of DST.' The trustee may not renegotiate the debt, renegotiate the lease or sign leases with other tenants except on the tenant's bankruptcy or insolvency, accept additional contributions, or make more than minor non-structural changes. The seven deadly sins of a DST sets the full list out.
For a TIC that means the group's refinancing, if one is needed, happens while it is still a TIC, under the unanimous vote its agreement probably requires. The lender also has to agree to the trust taking the property subject to the loan, an issue the page for legacy TIC owners facing a maturity covers. A multi-tenant building with leases that roll every year fits poorly, because the trustee could not sign the renewals; the ruling's structure is a single net lease to a tenant that may sublease.
Every owner has to deed in, at the same percentage it holds today
A tenant in common owns its share, so nobody can contribute it to a trust except that owner. A co-owner who will not join either sells its interest first, to the others or an outsider, or the conversion stalls; TIC exchanges without unanimous consent covers those routes. A trust holding part of a building beside a remaining tenant in common is not the arrangement the ruling describes.
Keep the percentages identical. The ruling's analysis rests on each owner holding the same undivided fraction before and after; an owner who takes cash at conversion or comes out with a larger share than it put in has a separate purchase or sale to account for.
The group must also be a co-ownership in the first place. If it has filed partnership returns, the partnership owns the building, the members own partnership interests, and whether your TIC must follow Rev. Proc. 2002-22 and drop-and-swap planning explain the restructuring that has to come first.
Worked model: four equal owners, a new loan, then the trust
Hypothetical, round numbers. Four co-owners each hold 25 percent of a building worth $8,000,000 with a $4,000,000 blanket loan maturing in 18 months. While still tenants in common, they vote unanimously to refinance the $4,000,000 for ten years and to sign a ten-year net lease with a single tenant that sublets to the occupants.
They then form a trust, each deeds its 25 percent into it, and each receives a 25 percent beneficial interest. Before and after, each owner is treated as holding a quarter of an $8,000,000 building subject to a quarter of a $4,000,000 loan, and no cash changes hands. If one owner had instead taken $200,000 at closing, that payment would need its own analysis.
The numbers only illustrate the sequence. Your counsel should confirm the conversion steps in writing and your CPA should model your own basis and debt before anyone signs.
What the group gives up by converting
The same restrictions that remove the votes also remove the flexibility. When the trust's loan comes due or the tenant leaves, the trustee cannot refinance or re-lease, so the trust agreement must provide another route, such as a sale or a conversion to an LLC, which the springing LLC answer explains.
A beneficial interest is also illiquid. The ruling's interests are not traded on any established market, the owners give up control of leasing and financing to the trust documents, distributions depend on one tenant paying, and the building's value, and with it each owner's investment, can fall. Owners who would rather join an existing trust than build one can compare a traditional DST bought through an exchange.
Related questions
Is moving our building into the trust a taxable sale?
Rev. Rul. 2004-86 treats each beneficial owner as owning its undivided fraction of the trust's real estate and says the outcome is unchanged when co-owners form the trust by contributing their interests. No ruling we opened addresses a long-held TIC converting years after purchase, so ask counsel for a written view before closing.
Can new investors buy into the trust after we convert?
Not by putting new money into the trust, because the ruling bars the trustee from accepting additional contributions. In the ruling the interests are freely transferable, so a newcomer can buy an existing owner's interest, subject to the trust agreement and the lender.
One co-owner refuses. Can the rest of us convert anyway?
Only if that owner sells its share first. Its deed is its own, and a trust owning part of the building beside a remaining tenant in common is outside the facts the ruling approved.
Do we still need our TIC agreement's unanimous vote?
Yes, for the steps taken before conversion. Section 6.05 of Rev. Proc. 2002-22 lists refinancing, leasing and a sale of the property as unanimous items, and agreements written to it follow that list. The ruling's trust gives owners no such votes afterwards.
Can each of us exchange out of the trust later?
Yes. Because each owner is treated as holding an undivided interest in the building, each can run its own exchange of its share when the trust sells, provided the usual section 1031 requirements are met.
Sources
Checked against these publications on October 8, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- IRS, Rev. Rul. 2004-86, Delaware statutory trust interests
- Delaware Code, title 12, chapter 38, subchapter I, statutory trusts
- IRS, Rev. Proc. 2002-22, undivided fractional interests in rental real property
- Reg. section 301.7701-1, classification of organizations for federal tax purposes
- Reg. section 1.1031(a)-3, definition of real property