The like-kind ownership problem
A 1031 exchange requires that you exchange real property for real property. Most syndications are structured as LLCs or limited partnerships, so when you invest, you receive a partnership interest — not a direct interest in real property. The IRS does not treat a partnership interest as like-kind to real property, so you cannot exchange your rental into a typical syndication without paying tax.
This is a critical distinction. Even though the syndication itself owns real estate, you own equity in a business entity. The tax treatment follows the form of ownership, not the underlying asset.
The DST exception
A Delaware Statutory Trust (DST) is the primary workaround. Under Revenue Procedure 2002-22, a beneficial interest in a DST is treated as an undivided fractional interest in real property rather than a partnership interest — making it like-kind to other real property for 1031 purposes.
DST investors receive a proportional interest in the trust's real estate, not an interest in a business entity. That distinction is the key. DSTs are widely used for 1031 exchanges into institutional-quality properties (multifamily, net lease, medical) that individual investors couldn't buy directly. Minimum investments are typically $25,000–$100,000, and the structure has restrictions — no refinancing, no new capital calls, no management control by investors.
Tenancy in common as an alternative
A tenancy-in-common (TIC) arrangement can also qualify as like-kind real property under IRS guidance, provided there are no more than 35 co-owners and the arrangement doesn't look like a partnership. TIC deals are less common than DSTs today due to their complexity and the SEC registration requirements for public TIC offerings.
If you want to diversify into large commercial properties through a 1031, work with a Qualified Intermediary and a DST sponsor early — DST options are limited by availability and the 45-day identification deadline creates real time pressure.
Frequently asked questions
Can I 1031 into an LLC that owns real estate?
Not directly — you would receive a partnership interest, not real property. A DST or TIC structured to meet IRS requirements is the way to access syndication-like investments inside a 1031.
What is a DST?
A Delaware Statutory Trust is a legal entity where investors hold beneficial interests treated as real property ownership for tax purposes, making it eligible as replacement property in a 1031 exchange.
Are there restrictions on DSTs?
Yes. Once a DST is formed, investors cannot refinance the debt, contribute new capital, or take control of management. These "seven deadly sins" preserve the DST's tax treatment. DSTs are illiquid and have a fixed hold period typically of 5–10 years.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.