In short
A DST interest is treated as real property and can take 1031 proceeds; an LLC or LP syndication interest cannot. The short version of why, and what it costs you.
A Delaware Statutory Trust interest can receive 1031 exchange proceeds because the IRS treats it as an interest in real property. A syndication interest, meaning a membership or partnership interest in an LLC or LP that owns real estate, cannot, because a partnership interest is not real property. That single difference decides which one your exchange money can buy. Everything below is the detail behind that sentence; the full comparison is at DST vs REIT vs syndication.
What you own in each
In a DST you hold a beneficial interest in a trust that holds title to one or more properties. In Rev. Rul. 2004-86 the IRS looked at a trust whose trustee’s activities “are limited to the collection and distribution of income,” and held that the trust 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 under section 1031, if the other requirements are met. Our page on what you own in a DST walks through the documents.
In a syndication you hold units in an LLC or limited partnership. The sponsor is the manager or general partner. You own an interest in an entity, and the entity owns the building.
Why one qualifies and the other does not
Since 2018, section 1031(a)(1) applies only to “real property held for productive use in a trade or business or for investment” exchanged for real property of like kind. Reg. section 1.1031(a)-3 defines real property as land, improvements to land, unsevered natural products, water and air space, and a short list of intangible interests: fee ownership, co-ownership, a leasehold, an option, an easement, stock in a cooperative housing corporation. An LLC membership interest or a partnership interest is not on that list. Rev. Rul. 2004-86 itself recites the older statute’s exclusion of “interests in a partnership,” and the ruling’s whole point is that a properly restricted DST is not a partnership, so its interests are not partnership interests.
The practical result: wire exchange funds into a syndication and the intermediary has bought you something that is not like kind. The deferred gain is recognized. See exchanging into a syndication, fund or LLC interest for the detail, and exiting a syndication with a 1031 if you already hold one.
Control: the trade that makes the DST work
The DST qualifies because the trustee is tied down. In the ruling’s facts the trustee may not accept additional contributions, may not “renegotiate the terms of the debt,” may not renegotiate the lease or lease to a new tenant except on the tenant’s bankruptcy or insolvency, may not reinvest sale proceeds in new property, may hold cash between distributions only in short-term obligations, must distribute cash less reserves, and may make only “minor non-structural modifications” to the property. Those limits are commonly called the seven deadly sins.
A syndication manager can do every one of those things. It can refinance, raise more capital, re-lease, renovate and sell and buy again. That flexibility is why syndications can run value-add plans, and it is exactly why a syndication interest is a partnership interest rather than real property.
What the choice costs, in round numbers
A hypothetical: you have $500,000 of exchange proceeds and a deferred gain of $300,000. Put the $500,000 into a DST and the $300,000 stays deferred. Put it into a syndication and the exchange fails as to that $500,000; the $300,000 is recognized in the year of the sale (or the following year if the intermediary pays you after year-end), with unrecaptured section 1250 gain taxed at up to 25 percent and the rest at the capital gains rates. Run your own numbers with your CPA.
Both products are securities sold under Regulation D, usually under Rule 506(b) or 506(c) of 17 CFR 230.506, so both will ask about accredited status; our plain-words accredited investor explainer covers the tests. The DST’s exit also differs: when the trust sells, you can exchange again, while a syndication’s sale sends you cash and a Schedule K-1.
What to do now
- If the money is exchange proceeds, limit the list to real property interests: a DST, a deeded property, or a direct title security.
- If some of the money is not exchange proceeds, a syndication is back on the table for that part; read the DST vs REIT vs syndication comparison before choosing.
- Ask every sponsor for the trust agreement or operating agreement and check which entity type you are buying. The answer is on page one.
