Knowing the ABCs of DSTs, TICs, and 1031s

Investing in real estate, particularly commercial and multifamily properties, can provide a valuable diversification strategy. Real estate not only has the potential to generate consistent income, but it can also contribute significantly to long‑term wealth building. Unlike stocks and bonds, real estate is a tangible asset that can offer income, appreciation, tax advantages, and a hedge against inflation when used thoughtfully and in the right structure.

At 1031 Exchange Place, we’re here to help you navigate these complexities, ensuring you make informed decisions that align with your financial goals.

The Importance of Real Estate in Investment Portfolios

Real estate is the third‑largest asset class in the U.S., just behind equities and bonds. Millions of investors allocate a portion of their portfolio to income‑producing properties like commercial, retail, industrial, self‑storage, and multifamily real estate. This diversification strategy is appealing because it not only produces potential monthly or quarterly cash flow but also creates the opportunity for long‑term appreciation.

From a portfolio construction standpoint, private real estate has historically shown low correlation to traditional equities and fixed income. That means it can help smooth returns across market cycles. Income from rents may provide a buffer in volatile markets, while disciplined leverage allows investors to amplify returns without taking on the daily price swings associated with public securities. Additionally, real estate introduces distinct risk drivers—tenant demand, location quality, property management, and local supply pipelines—that are different from the macro factors moving stocks and bonds. When combined thoughtfully, those differences can reduce overall portfolio volatility.

It’s also important to think about the role of real estate over time. As investors approach retirement or other milestones, they often look to lower‑maintenance, income‑oriented strategies. Many long‑time landlords eventually tire of the hands‑on responsibilities—late‑night repair calls, leasing, compliance, and capital projects—and seek a smoother path to passive income with potential tax efficiency. That’s where DSTs, TICs, and the 1031 exchange can work together as powerful tools.

Before you invest—or if you’re considering expanding your real estate portfolio—it’s crucial to understand two increasingly popular passive investment vehicles and one of the most attractive tax benefits available to real estate investors: Delaware Statutory Trusts (DSTs), Tenants‑in‑Common (TICs), and the 1031 exchange.

Passive Real Estate Investment Options: DSTs vs. TICs

Not every investor wants the responsibility of being a landlord. Managing tenants, coordinating repairs, negotiating leases, and keeping up with building systems and regulatory compliance can be time‑consuming and stressful. Fortunately, passive real estate investment vehicles like DSTs and TICs provide the chance to own institutional‑quality properties—such as Class A apartments, medical offices, distribution centers, and necessity retail—without day‑to‑day management.

Both structures allow multiple investors to pool capital and own fractional interests in large assets, but they differ in governance, financing, and investor control. Understanding those differences will help you choose the approach that matches your goals, risk tolerance, and timeline.

What Is a Delaware Statutory Trust (DST)?

What a DST is: A Delaware Statutory Trust is a legal entity that can hold title to real estate for the benefit of multiple investors. You buy a beneficial interest in the trust rather than a deeded slice of the real estate. DSTs are typically sponsored by professional real estate firms that source the property, arrange financing if any, and handle all management responsibilities.

Why investors consider DSTs:

• True passivity: The sponsor (or its affiliates) oversees property operations, leasing, maintenance, accounting, and strategic decisions. Investors receive distributions and periodic reporting without operational duties.
• Access to institutional assets: Think stabilized multifamily communities in strong job markets, medical office portfolios leased to health systems, or industrial logistics facilities with long‑term tenants. These are properties individual investors might not acquire alone.
• 1031 compatibility: DST interests generally qualify as like‑kind replacement property for a 1031 exchange, allowing investors to defer capital gains and depreciation recapture when reinvesting proceeds.
• Diversification: Some DSTs hold a portfolio of properties across markets and tenants, spreading risk.

How DSTs work in practice:

• Acquisition & financing: The sponsor secures the property, often with fixed‑rate, non‑recourse financing sized to support targeted distributions. Once the trust is finalized, investors subscribe for interests until the offering is fully allocated.
• Cash flow & reporting: Net operating income (after expenses and debt service) is distributed to investors, commonly monthly or quarterly. Investors receive K‑1s or grantor trust statements (depending on structure) and regular asset updates.
• Hold period & exit: Typical hold periods range from 5–10 years, though they can be shorter or longer. At disposition, investors receive sale proceeds, at which point many execute another 1031 exchange to continue tax deferral.

Key considerations & risks for DSTs:

• Limited control: Investors do not vote on everyday decisions; major events may require consent, but the sponsor largely drives strategy. For many, that is a benefit—it’s truly passive—but it does mean giving up control.
• Illiquidity: DST interests are not designed to be traded. Your capital is generally committed until the sponsor sells the property or the trust winds down.
• Interest rate & market risk: Property values and lending costs impact distributions and exit proceeds. Fixed‑rate debt can stabilize cash flow, but market conditions still matter at sale.
• Sponsor quality: Due diligence on the sponsor’s track record, fees, underwriting assumptions, and property‑level business plan is critical.

Due diligence checklist for DSTs:

1. Sponsor track record: Prior full‑cycle deals, realized performance versus pro formas, and management depth.
2. Property fundamentals: Location, tenant credit, lease expiration schedule, rent growth assumptions, and competitive set.
3. Debt terms: Fixed/variable, interest‑only periods, maturity, covenants, prepayment flexibility, and refinance risk.
4. Fee structure: Acquisition fees, asset management fees, property management, disposition fees; confirm how incentives align with investors.
5. Reserves & capex: Budgeting for turnover, maintenance, and long‑term capital projects.
6. Exit strategy: Sensitivity analyses for conservative/neutral/optimistic scenarios.

Who might favor DSTs: Retiring landlords seeking to replace hands‑on ownership with mailbox income, investors who value sponsor expertise and simplicity, or exchangers facing tight 45‑day identification windows who need ready‑to‑close options.

What Is a Tenants-in-Common (TIC) Structure?

What a TIC is: A Tenants‑in‑Common structure is a form of direct fractional ownership. Each investor holds a deeded percentage interest in the same property, and all co‑owners generally share certain major decisions based on unanimous or supermajority consent, as specified in the TIC agreement.

Why investors consider TICs:

• Direct ownership rights: You’re on title with a deeded interest. Some investors value this for estate planning and personal preference.
• Financing flexibility: TICs can sometimes accommodate individualized financing or varying capital contributions, though lenders frequently require uniformity across owners.
• 1031 compatibility: TIC interests can also qualify as like‑kind property in a 1031 exchange, enabling tax deferral.

How TICs work in practice:

• Governance: Co‑owners enter a TIC agreement that defines decision rights: who manages day‑to‑day operations (often a manager is appointed), which decisions require unanimous consent (like a sale or major refinance), and how disputes are resolved.
• Operations & distributions: Net income is distributed pro rata to owners. If a property manager or asset manager is engaged, their scope and fees are outlined in separate agreements.
• Hold period & exit: TICs can run for many years. Because multiple deeded owners must coordinate, sales or refinances may take longer than single‑owner transactions.

Key considerations & risks for TICs:

• Coordination complexity: Unanimous consent requirements can slow decision‑making during time‑sensitive events (tenant defaults, refinance windows, sale opportunities).
• Lender requirements: Some lenders limit the number of TIC owners, require single‑purpose entities, or ask for carve‑outs/guarantees from key principals.
• Transfer restrictions: TIC agreements often restrict transfers to maintain lender compliance and operational stability.
• Illiquidity: As with DSTs, resales of fractional interests can be difficult; exits typically occur when the property is sold or a buyout is arranged.

Due diligence checklist for TICs:

1. TIC agreement terms: Consent thresholds, buy‑sell provisions, transfer limitations, and dispute resolution mechanisms.
2. Manager capabilities: Track record and responsibilities of any appointed manager (if applicable).
3. Debt structure: Cross‑collateralization, recourse carve‑outs, maturity dates, and lender consent requirements.
4. Co‑owner alignment: Investment horizon, risk tolerance, and liquidity expectations of other co‑owners.
5. Property metrics: Just as with DSTs—location, tenancy, leases, capital needs, and market outlook.

Who might favor TICs: Investors who prefer deeded ownership and are comfortable with a little more involvement/consensus, groups of family members or partners coordinating a larger acquisition, or exchangers desiring more bespoke control than a DST typically allows.

What Is a 1031 Exchange? Rules, Timelines & Tax Advantages

A 1031 exchange (named for Section 1031 of the Internal Revenue Code) allows investors to defer capital gains taxes and depreciation recapture when selling an investment or business property and reinvesting the proceeds into another qualifying “like‑kind” real property held for investment or productive use in a trade or business. Deferral keeps more capital invested and working, potentially compounding wealth over multiple exchanges.

Core mechanics:

• You sell a relinquished property and, with the help of a Qualified Intermediary (QI), place the proceeds into a segregated account. You cannot receive or control the funds.
• You must identify potential replacement property within 45 days of closing the sale and acquire the replacement property within 180 days of the sale (or the due date of your tax return, including extensions, if earlier).
• To fully defer taxes, you generally need to purchase property of equal or greater value, reinvest all net proceeds, and replace equal or greater debt (or offset debt reduction with additional cash).

What counts as like‑kind: For real property, “like‑kind” is broadly interpreted—raw land, multifamily, retail, industrial, medical office, triple‑net leased assets, and certain fractional interests such as qualifying DST or TIC interests are all generally like‑kind to one another as long as they are held for investment or business use. Primary residences and flips held primarily for resale do not qualify.

Identification rules (choose one):

1. Three‑property rule: Identify up to three properties regardless of value; acquire one or more.
2. 200% rule: Identify any number of properties as long as the total aggregate value doesn’t exceed 200% of the relinquished property’s value.
3. 95% rule: Identify any number of properties and acquire at least 95% of the aggregate value identified.

Types of exchanges:

• Delayed exchange: The most common; sell first, then buy within the timelines.
• Simultaneous exchange: Sale and purchase occur the same day using a QI.
• Reverse exchange: Acquire the replacement property before selling the relinquished property using an exchange accommodation titleholder.
• Improvement (construction) exchange: Use exchange funds to improve the replacement property during the 180‑day window, with careful structuring.

Beware of “boot”: Cash or other non‑like‑kind property received in the exchange is called boot and is taxable to the extent of the boot received. Similarly, if you reduce your debt and don’t replace it with new debt or additional cash, the reduction can be treated as boot. Planning debt replacement early helps you avoid surprise tax bills.

Depreciation & basis: Your basis generally carries over to the replacement property and is adjusted for any additional cash invested and any gain recognized (e.g., boot). Over multiple exchanges, your deferred gain can be substantial—one reason many investors use 1031s as part of long‑term wealth strategies and estate planning. (Heirs may receive a basis step‑up under then‑current law, which can further optimize outcomes—consult your tax advisor.)

Where DSTs and TICs fit: Both structures can serve as replacement property in an exchange. DSTs are often used by exchangers who:

• Need to close reliably within the 180‑day window.
• Want professional management and passive income.
• Prefer to diversify across multiple properties or sectors using fractional interests.

TICs can suit exchangers who:

• Want deeded ownership with tailored governance.
• Are comfortable coordinating with co‑owners on major decisions.
• Prefer a specific asset and are willing to navigate lender requirements.

Common pitfalls to avoid:

• Missing deadlines (45/180 days) or failing to properly identify properties.
• Taking constructive receipt of funds (even briefly) instead of using a QI.
• Underestimating closing timelines, lender diligence, or third‑party consents.
• Overly aggressive projections on rents, cap rates, or exit values.
• Neglecting state‑specific rules or withholding requirements.

Illustrative example for a retiring landlord (simplified, hypothetical):

• Investor background: Maria, age 67, has owned and actively managed a 20‑unit apartment building for 22 years. She’s tired of late‑night repair calls and rising compliance burdens and wants reliable, passive income without a large tax bill.
• Current property: Sale price $3,200,000; outstanding debt $1,100,000; adjusted basis $1,400,000. Without an exchange, Maria estimates six‑figure taxes on capital gains and depreciation recapture.
• Exchange objective: Fully defer taxes, simplify her life, diversify across asset types, and target steady monthly distributions (not guaranteed).

• Strategy: Maria engages a Qualified Intermediary and identifies three potential replacement options within 45 days. She ultimately acquires interests in two DSTs within 180 days:
  • DST A (Multifamily): Stabilized Class A apartments in a growth market. Maria allocates $900,000 equity and assumes $700,000 of fixed‑rate, non‑recourse debt (her share).
  • DST B (Medical Office): On‑campus medical offices with long‑term leases to strong tenants. Maria allocates $800,000 equity and assumes $400,000 of fixed‑rate, non‑recourse debt (her share).
• Debt/equity alignment: By reinvesting all net proceeds and replacing equal or greater debt, Maria fully defers capital gains taxes and depreciation recapture (subject to her CPA’s confirmation). She avoids boot by not receiving cash and by matching debt reduction with additional cash where needed.
• Cash flow & lifestyle: The DSTs send monthly distributions sourced from net operating income (targets only; not guaranteed). Maria has no management duties—the sponsors handle operations, leasing, accounting, and reporting.
• Risk controls considered: Fixed‑rate debt to temper interest‑rate risk, ample operating reserves, diversified tenant mix, and conservative rent growth assumptions. Maria reviewed sponsor track records and stress tests under different exit cap rates.
• Exit & legacy: After a 7‑year hold, the DSTs plan to sell (timing not guaranteed). Maria can perform another 1031 exchange to continue deferral or evaluate estate options with her advisors. Her heirs may benefit from a basis step‑up under then‑current law.

Why Consider a 1031 Exchange Now?

Markets evolve. Interest rates, cap rates, construction pipelines, and demographic trends shift over time and by region. That reality creates windows of opportunity for investors willing to rebalance and reposition. Here are reasons many investors evaluate 1031 exchanges—often using DSTs or TICs—today:

1. Portfolio rebalancing: Shift from a single property in a single market into multiple assets across geographies and sectors for better diversification.
2. Lifestyle transition: Move from active management to passive income—particularly appealing for owners approaching retirement or seeking more time freedom.
3. Risk management: Reduce exposure to older assets with heavy capital needs by exchanging into newer buildings with modern systems and professional management.
4. Debt strategy: Lock in more predictable debt structures or reduce leverage risk via conservative financing built into the DST/TIC program.
5. Tax efficiency: Defer capital gains and depreciation recapture to keep more capital compounding.
6. Estate planning: Consolidate or simplify holdings for heirs, potentially using fractional interests that are easier to divide.

No market is perfect, but thoughtful repositioning—especially when tied to clear goals for income, diversification, and risk—can enhance long‑term outcomes.

Expert Guidance Is Essential

Executing a 1031 exchange is a legal and logistical process with strict rules and timelines. Coordinating property sales, debt, due diligence, and closing calendars requires expertise and proactive communication. Working with experienced professionals, such as the team at 1031 Exchange Place, can help you navigate the process smoothly.

Your professional team may include:

• Qualified Intermediary (QI): Holds proceeds, drafts exchange documents, and ensures the exchange complies with IRS rules.
• Real estate advisor/broker: Sources DST/TIC offerings or direct properties and helps evaluate suitability.
• Tax advisor/CPA: Models tax consequences, tracks basis and depreciation, and aligns the exchange with your broader tax plan.
• Real estate attorney: Reviews agreements, lender documents, and state‑specific requirements.
• Lender or mortgage broker: Structures replacement debt in coordination with the exchange timeline.

Our typical process at 1031 Exchange Place:

1. Discovery & goals: Clarify income needs, risk tolerance, time horizon, liquidity preferences, and legacy intentions.
2. Education: Compare DST vs. TIC vs. direct ownership; review 1031 timelines and identification strategies.
3. Pre‑qualification: Coordinate with lenders (if applicable), review net proceeds and debt replacement requirements.
4. Opportunity curation: Present vetted DST/TIC offerings or direct properties aligned with your criteria; review sponsor profiles, underwriting, and stress tests.
5. Identification plan: Craft a 3‑property, 200%‑rule, or blended approach to maximize flexibility within the 45‑day window.
6. Execution: Work with your QI, sponsor, and closing teams to complete documents and fund on schedule.
7. Post‑close monitoring: Provide ongoing updates on distributions, property performance, and exit strategies; prepare for future exchanges as appropriate.

Red flags to watch for: Overly optimistic rent growth assumptions, thin reserves, short‑term debt with near‑term maturities, tenant concentrations with weak credits, or sponsors without full‑cycle experience. A disciplined screening process helps you avoid these risks.

Final Thoughts & Next Steps

Whether you’re looking to diversify your holdings, step away from property management, or maximize tax efficiency, DSTs, TICs, and 1031 exchanges offer powerful tools for real estate investors. With the right strategy and expert guidance, these vehicles can help you protect and grow wealth across market cycles.

Now may be an ideal time to evaluate your portfolio and consider how these structures could support your long‑term goals. Contact us to explore how we can assist you in leveraging this powerful tax strategy—curating options, coordinating your exchange, and supporting you from education through execution and beyond.