The short answer
The trust is built to sell the property before the loan comes due, because a trustee who could refinance would turn the trust into a partnership under Rev. Rul. 2004-86. If a sale cannot be made in time, the usual fallback in the trust agreement is to move the property into a springing LLC, which can refinance but leaves you holding an LLC interest instead of real estate. If neither works, the nonrecourse lender's remedy is the property itself, and a foreclosure is taxed as a sale for the full loan balance.
At a glance
| Refinancing by the trust | Not allowed; it is one of the powers that ends trust status |
|---|---|
| Ruling's model | Ten-year loan, ten-year lease and a trust that ends after ten years or on sale |
| Normal exit | Sale before maturity, with proceeds distributed for your next exchange |
| Fallback | Transfer to a springing LLC under the trust agreement's triggers |
| Cost of the fallback | An LLC interest taxed as a partnership is not real property for a 1031 |
| Worst case | Lender takes the property; the loan balance counts as amount realized |
The trust cannot refinance, so its loan term is its deadline
Rev. Rul. 2004-86 lists five powers that would make a trust a business entity, taxed as a partnership if it has two or more owners. One of them is the power to 'renegotiate or refinance the obligation used to purchase' the property. In the ruling's own facts, the loan, the lease and the trust's term all run ten years, so financing is fixed for the trust's whole life.
Filed trust agreements write that limit in. One trust agreement filed with the SEC prohibits the trustee, manager and owners from renegotiating any loan or entering new financing once interests are sold. The same agreement lets the manager sell after the trust has held the properties for three years. A trust with a ten-year loan therefore has a window to sell, and the loan maturity is its outer edge.
The normal path is a sale, and your share comes back as exchange money
When the sponsor sells, the lender is paid off from the proceeds, sale costs and any fee due to the manager come out, and the balance is distributed to owners. If you want to defer again, set up your next exchange with an intermediary before the trust closes, so your share goes to the intermediary rather than to you; selling a DST and the next 1031 covers the timing.
Because a sale forced by an approaching maturity can come in a weak market, the loan term matters as much as the lease when you compare offerings. The DST leverage and interest rate risk page shows what to read in the memorandum.
If the trust cannot sell, a springing LLC can refinance, at a cost to your next exchange
Most trust agreements give the manager a way out when trust status becomes a straitjacket. In the filed agreement above, the triggers are a tenant rent default, a tenant bankruptcy or a breach of the tax-status provisions. On a trigger the manager transfers the property to a newly formed Delaware LLC and distributes the LLC interests to the owners. Some agreements add other triggers, so check whether yours names an impending loan default or maturity.
An LLC with two or more members is taxed as a partnership and can refinance, re-lease and raise capital. The cost is that your interest is now a partnership interest, which Reg. section 1.1031(a)-3 says is not real property for section 1031. When the LLC later sells, you cannot exchange your interest; you would need the LLC to distribute property to members first. The details are in what a springing LLC means for your next exchange.
Worked example: a ten-year loan in a weak year nine
Hypothetical round numbers; run your own numbers with your CPA. You own 5% of a trust that bought a $20,000,000 building in 2026 with a $10,000,000 ten-year loan maturing in 2036. In year nine, offers come in at $11,000,000.
Sale: the loan is repaid, and after costs your 5% share of roughly $1,000,000 is small but can go to your next exchange. Your share of the gain is still computed on the full price, including the debt repaid. Springing LLC: the LLC refinances and holds for a recovery, but you now own a partnership interest. Foreclosure: the lender takes the building, and under Reg. section 1.1001-2 your 5% share of the $10,000,000 nonrecourse balance is amount realized, so you can owe tax on gain with no cash to pay it.
That last outcome is the one to avoid. It is why the sponsor's plan for an exit well before maturity matters.
What to check before you invest, and where long-term trusts differ
Read the loan's maturity date, any extension options and the prepayment or defeasance terms, and compare them with the sponsor's expected hold. Then read the trust agreement's springing LLC triggers and the manager's sale authority. A memorandum that is vague on the exit plan is a reason to ask questions before day 45.
Zero cash flow trusts are structured differently and need their own reading; see zero cash flow DSTs explained and our cash out DST page. For any trust, a debt-free DST removes maturity risk entirely, at the cost of no replacement debt.
Related questions
Can investors vote to extend or refinance the loan?
No. Owners of a qualifying trust cannot give the trustee powers Rev. Rul. 2004-86 forbids; see who controls a DST.
Am I personally liable if the loan defaults?
In the standard structure the loan is nonrecourse to the trust and its owners, so the lender's remedy is the property. Carve-out guaranties are given by sponsor parties; see DST lender documents and carve-outs.
Can the trust use reserves to pay down the loan at maturity?
Reserves are set aside for property costs named in the trust agreement, and the trust cannot raise new capital from owners to repay debt. Retiring the loan normally means a sale.
Does a springing LLC conversion trigger tax?
The tax result depends on how the transfer is structured. Ask the sponsor for its tax counsel's view of the conversion and confirm the effect on your own return with your CPA.
Is a long loan term always better?
A longer term lowers maturity risk but may come with prepayment costs that make an early sale expensive. Compare it with the sponsor's hold plan.
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.