DST vs TIC: Choosing the Right Co-Ownership Structure for Your 1031 Exchange

Deed versus trust: a TIC puts up to 35 names on title, a DST puts one trustee there

In a tenancy in common each co-owner holds title to an undivided share under local law, directly or through a disregarded entity, and Rev. Proc. 2002-22 §6.02 caps the group at 35 persons, counting a married couple as one and everyone who inherits from a co-owner as one. In a DST the trust holds title and you hold a beneficial interest that 12 Del. C. §3805(a) calls personal property, which the IRS nevertheless treats as an undivided interest in the real estate because the trust is a grantor trust under Rev. Rul. 2004-86.

That single difference drives every line of the comparison.

• Investor count: TIC, 35 persons under §6.02; DST, no tax-law cap, limited instead by securities rules and the sponsor's offering size.
• Control: TIC, unanimous consent for sales, leases, blanket-lien debt and manager hires (§6.05); DST, no vote, and a trustee whose activities are limited to collecting and distributing income.
• Financing: TIC, each owner shares the blanket lien pro rata (§6.09) and is underwritten by the lender; DST, the trust is the only borrower and the note is nonrecourse to you.
• Fees: both sponsored products carry organization and selling costs; a self-assembled TIC among family avoids sponsor loads but not the partnership question.
• Operational complexity: TIC, votes, signatures and a management contract renewable at least annually (§6.12); DST, a subscription agreement and a periodic statement.
• 1031 comfort: DST, a published revenue ruling the 2020 regulations preamble reaffirmed; TIC, ruling guidelines that §3 says 'are not intended to be substantive rules'.

Control and voting: every TIC sale needs every signature, and no DST decision needs yours

Section 6.05 requires unanimous approval for 'any sale, lease, or re-lease' of the property, any negotiation of blanket-lien debt, the hiring of any manager and any management-contract renewal; other actions may be decided by holders of more than 50% of the interests, and no co-owner may hand a manager a global power of attorney. Section 6.06 adds that each owner must stay free to transfer, partition and encumber its own share, subject only to customary lender restrictions and a right of first offer.

A DST investor has none of those rights and none of those burdens. The trustee in Rev. Rul. 2004-86 may not sell and reinvest, re-lease, refinance or improve beyond minor non-structural work, so most of the decisions a TIC group votes on cannot happen in a DST at all.

The practical test is the holdout. In a TIC one co-owner can block a refinancing or a sale you want; in a DST nobody can block a sale the sponsor wants, including you.

Financing: one nonrecourse loan the trust already carries versus a blanket lien each co-owner is underwritten for

In the DST ruling the sponsor borrowed on a 10-year nonrecourse note before selling interests, the trust assumed it, and 'neither DST nor any of its beneficial owners are personally liable' to the lender. Capital Square describes the same practice today: investors 'do not provide tax returns to lenders or sign loan documents because the lender does not underwrite investors; the sponsor signs any carve-out guaranty'.

A TIC lender faces up to 35 borrowers. Section 6.09 requires each co-owner to share blanket-lien debt in proportion to its interest, §6.14 requires a lender unrelated to any co-owner, sponsor, manager or lessee, and any renegotiation of that debt needs unanimous consent under §6.05.

Hypothetical: a $1,000,000 exchange buys a 10% TIC share of a $10,000,000 building carrying a $4,000,000 blanket loan, so you are underwritten for and share $400,000 of debt and hold one of ten votes. The same $1,000,000 in a DST whose loan allocates $400,000 of nonrecourse debt to your interest gives you the same debt replacement with no signature and no vote, and a loan that can never be changed.

IRS comfort today: a ruling you can cite, guidelines you cannot, and the Gluck return-matching failure

Rev. Rul. 2004-86 holds that the trust it describes is an investment trust and that exchanging real property for an interest in it qualifies under §1031, and the 2020 preamble to T.D. 9935 adds that nothing in the post-2017 statute or regulations 'is contrary to the view that a transfer of an interest in a DST, if a grantor trust, is treated as the transfer of the underlying property'. Rev. Proc. 2002-22 offers no equivalent: its §3 says the guidelines are 'not to be used for audit purposes', and Bergford, the case it discusses, treated 78 co-owners whose manager took a 10% remarketing fee as partners.

Gluck v. Commissioner, T.C. Memo. 2020-66, affirmed by the Second Circuit in March 2022, shows the failure mode. As summarized by Legal 1031, the co-ownership the Glucks bought into filed Form 1065 and issued K-1s showing their share rising from 0% to 50% in 2012; the IRS found the Glucks' return inconsistent with the partnership return, disallowed the exchange, and the added tax exceeded $1.5 million.

A DST has its own cliff: if the trustee is given any of the five powers the ruling lists, the trust becomes a partnership. The difference is that a DST's powers are fixed in a trust agreement you can read before closing, while a TIC's status depends on how 35 people and their manager behave for years.

When a TIC still beats a DST

A TIC is the better structure when the vote is the point. If the property needs decisions a DST trustee is forbidden to make, or you want to hold title through your own LLC and control the exit date, the unanimity rule is a feature rather than a bug.

Have your CPA or attorney read the co-ownership agreement before you commit, because the partnership question is decided by conduct, not by the label on the deed.

• You expect to re-lease, refinance or improve the property during the hold, all of which a TIC can vote to do and a DST cannot.
• You want the §6.06 right to sell, partition or encumber your share on your own timetable rather than wait for a trust-level sale.
• The co-owners are a small, known group, ideally family or long-standing partners, so the 35-person cap and the unanimity rule stay manageable.
• You are prepared to be underwritten, to sign for your share of the loan, and to keep the group from ever filing a partnership return (§6.03).
• The property is one you would happily own outright; a TIC only divides ownership, it does not add professional management or diversification.