The short answer
Yes. The partnership is the taxpayer that sold, so it can be the taxpayer that buys: it subscribes for Delaware Statutory Trust interests in its own name, and the partnership, its agreement and its tax return all carry on. The IRS treats the owner of a qualifying trust interest as owning an undivided interest in the trust's real estate, so the purchase is like-kind replacement property. What changes is who has to qualify as an accredited investor: the entity does, either on its own assets or because every partner is accredited.
At a glance
| Who exchanges | The partnership, not the individual partners |
|---|---|
| Replacement | DST beneficial interests held in the partnership's name |
| Like-kind basis | Rev. Rul. 2004-86 treats each holder as owning part of the real estate |
| Entity accreditation | Over $5,000,000 in total assets, not formed to buy the offering |
| Fallback test | Every equity owner of the partnership is accredited |
| Income path | Trust to partnership, then to partners under the partnership agreement |
| Later wind-down | Liquidating distributions of property are generally tax-free under section 731 |
| Flag on the return | Form 1065 asks whether replacement property was distributed in the exchange year or the next |
The partnership sold the building, so the partnership has to be the buyer
Nonrecognition belongs to whoever transferred the relinquished property. When an LLC taxed as a partnership holds title, the LLC is the exchanger, and the replacement has to land in the LLC as well. The individual members cannot each exchange their slice, because a partnership interest is not real property and section 1031 now applies only to real property.
That is usually good news for a group that wants to stay together. Nothing has to be deeded out, re-formed or renegotiated: the same entity, with the same tax ID, the same agreement and the same allocation rules, closes on the replacement. The rule that ties the two sides together is covered in the same taxpayer rule.
If some members want different replacements or cash, that is a different problem with different tools, set out in partners who want different replacement properties.
A trust interest counts as real estate, and an entity can hold it
Rev. Rul. 2004-86 holds that a Delaware statutory trust meeting its conditions is an investment trust classified as a trust, and that a taxpayer 'may exchange real property for an interest in the Delaware statutory trust' without recognizing gain, if the other requirements of section 1031 are met. Because the trust is a grantor trust, each holder is treated as owning an undivided fractional interest in the property.
Nothing in the ruling limits holders to individuals. The holder's share of the trust's income and deductions is included in that holder's taxable income, so when the holder is a partnership, those items flow into the partnership's return and out to the partners on their Schedule K-1s under the existing agreement.
The ruling's conditions bind the trustee, not the partnership. The trustee may not accept new contributions, refinance the loan, renegotiate the lease or buy new property, which is why the partnership becomes a passive owner. How those limits work is covered in DST like-kind qualification.
Accreditation is judged on the partnership, and there are two ways in
Trust interests are securities sold in private placements, and buyers generally must be accredited investors under 17 CFR 230.501(a). A partnership or LLC qualifies on its own if it has 'total assets in excess of $5,000,000' and was not 'formed for the specific purpose of acquiring the securities offered'. A partnership that has owned a building for years was not formed to buy the trust interest, so the asset test is the usual route for larger sales.
A smaller partnership can still qualify if 'all of the equity owners are accredited investors'. That pulls each partner back into the test: for individuals, net worth over $1,000,000 or income over $200,000 ($300,000 jointly) in each of the last two years, among other routes. One unaccredited member blocks this path.
Expect the sponsor to ask for the operating agreement, a list of members and evidence for whichever test you use. The detail is in DST accredited investor rules.
Worked example: a $3,000,000 sale by a three-member LLC
Hypothetical, round numbers; run your own numbers with your CPA. An LLC owned 50/30/20 sells a building for $3,000,000, repays a $1,000,000 loan at closing and leaves $2,000,000 with the qualified intermediary. To avoid boot, the LLC needs replacement property of at least $3,000,000 in value, with the $1,000,000 of debt replaced by new debt or added cash.
The LLC subscribes $2,000,000 across two trust offerings whose loans allocate at least $1,000,000 of debt to its interests. Its total assets are under $5,000,000, so it qualifies only if all three members are accredited. Distributions arrive in the LLC's account and are paid 50/30/20, and depreciation is allocated the same way unless the agreement says otherwise.
No member files Form 8824; the LLC does, with its partnership return, as described in how a partnership exchange is reported on the K-1.
Dissolving later is possible, but timing and the trust agreement both matter
Once the exchange is done, the partnership can in principle distribute its trust interests to the members. Under section 731 a partner recognizes gain on a distribution only when money exceeds the partner's basis, and section 735(b) lets the partner tack the partnership's holding period.
The risk is the holding requirement. Form 1065's Schedule B asks whether the partnership received replacement property in an exchange in the current or preceding year and distributed it this year, so a quick distribution is visible. The Ninth Circuit accepted continued investment through a change of ownership form in Magneson and Bolker, but those cases are not a safe harbor.
Read the trust agreement before you plan a distribution, because transfers of beneficial interests are governed by its terms. A simpler path is often to keep the partnership until the trust sells its property, then decide together, or member by member, as set out in what happens when a DST sells.
Related questions
Does each partner have to sign the DST subscription documents?
The partnership is the investor, so an authorized manager or general partner signs for it. The sponsor will usually ask for the entity's governing documents and evidence of accreditation, which may involve every partner if the entity relies on the all-owners-accredited test.
Will the partnership get a K-1 from the trust?
The trust is a grantor trust under Rev. Rul. 2004-86, so its items are reported to the holder as owner of a fractional interest rather than as a partnership. Ask the sponsor which annual tax statement it issues, then your preparer carries those items onto the partnership return.
Can one partner take cash while the rest go into the DST?
Not out of the exchange without consequences: cash boot is taxed at the partnership level and allocated under the agreement. See who is taxed when a partnership distributes cash to one partner.
Can the partnership split its money across several trusts?
Yes. Several trust offerings, or a trust alongside a direct property, can all be replacement property if they are identified on time; see splitting an exchange between a DST and a direct property.
Does our state still tax the partnership's deferred gain?
Most states follow federal deferral, but some track it or withhold at closing; check your state page under 1031 exchange rules by state.
Sources
Checked against these publications on September 30, 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.
- 26 U.S.C. Section 1031, like-kind exchanges
- IRS, Rev. Rul. 2004-86, Internal Revenue Bulletin 2004-33
- 17 CFR 230.501, accredited investor definition
- 26 U.S.C. Section 731, partnership distributions
- 26 U.S.C. Section 735, holding period of distributed property
- IRS, Instructions for Form 1065 (2025)
- Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985)
- Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985)