The short answer
A grantor trust is a trust in which the grantor, or another person, is treated as the owner of the trust's assets for income tax purposes, so the trust's income, deductions and credits are reported by that person rather than by the trust. The rules are in sections 671 through 679 of the Code. For exchanges the consequence is direct: the owner is treated as holding the trust's real estate, which is what lets a revocable living trust or a properly structured Delaware Statutory Trust interest sit on either side of a section 1031 exchange.
At a glance
| Who is taxed | The grantor or other person treated as owner, not the trust |
|---|---|
| Common examples | Revocable living trusts, and DSTs structured under Rev. Rul. 2004-86 |
| Effect in an exchange | The owner is treated as owning the trust's assets directly |
| Reporting | The trustee may furnish the owner a statement instead of reporting income on Form 1041 |
Grantor trust status comes from powers and benefits the Code attributes to the owner.
Section 671 says that where the grantor or another person is treated as the owner of any portion of a trust, that portion's items are included in computing that person's taxable income. Sections 673 through 679 list the triggers. The two that matter most for real estate are section 676, the power to revest title in the grantor, which is what a revocable trust has, and section 677, a right to the trust's income.
Rev. Rul. 2004-86 applies these rules to a Delaware Statutory Trust. Investors who buy interests are treated as grantors under Reg. section 1.671-2(e)(3), are owners of their portions under section 677, and so are each considered to own an undivided fractional interest in the trust's real estate. The ruling concludes that the exchange is of real property for an interest in real property, not for a certificate of beneficial interest.
A hypothetical: a DST investor reports her share of rent as if she owned the building.
Hypothetical figures: an investor exchanges a rental house into a 5% interest in a DST that owns a $20,000,000 warehouse. For tax purposes she is treated as owning 5% of the warehouse, so 5% of the rent, interest expense and depreciation flow to her own return.
The trustee does not issue a Schedule K-1, because the trust is not a partnership. Under Reg. section 1.671-4, a trustee of a trust owned by one or more grantors may report by furnishing each owner a statement of the items attributable to that owner, which in practice is the year-end statement covered in the planned grantor letter entry. Run your own numbers with your CPA.
It bites when trust powers grow, when the grantor dies, and when reporting goes wrong.
Rev. Rul. 2004-86 warns that a DST trustee with power to sell and buy property, renegotiate leases or refinance makes the trust a business entity, which with two or more owners is a partnership, and partnership interests cannot be exchanged. That is the source of the limits described in the DST seven deadly sins.
For a revocable trust, grantor status rests on the power to revoke, so it ends at the grantor's death and the trust becomes a separate taxpayer. Exchanges started by a grantor who then dies need prompt advice; the family-trust side is in trust-owned 1031 strategies.
Related questions
Is every revocable living trust a grantor trust?
Yes, as long as the grantor holds the power to revoke, because section 676 treats a grantor who can revest title as the owner. How that plays out in an exchange is in the revocable living trust entry.
Does a grantor trust need its own tax ID?
Not always. Under Reg. section 301.6109-1(a)(2), a trust treated as owned by one grantor that reports under the method in Reg. section 1.671-4(b)(2)(i)(A) need not obtain a separate number. Trusts with several owners, such as a DST, report under their own number.
Is an irrevocable trust ever a grantor trust?
It can be, if the grantor keeps a power or benefit listed in sections 673 through 679, such as a right to income under section 677. Whether a particular trust qualifies is a drafting question for the trust's attorney.
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.