Can You Use 1031 Exchange Money in a Syndication? TICs, DSTs & UPREITs Explained

Why It Matters

Understanding these structures lets investors preserve 1031 tax deferrals and enables sponsors to tap high‑value capital, but missteps can trigger costly compliance failures.

Key Takeaways

• 1031 exchanges cannot directly fund partnership interests in syndications.
• Tenants-in-common (TIC) structures allow fractional ownership for 1031 investors.
• DSTs offer a trust-based alternative but require strict compliance and scale.
• Sponsors face higher fees, admin costs, and compensation limits with TIC/DST.
• Large dollar thresholds make 1031 capital viable for syndicators.

Summary

The episode tackles a common question among real‑estate investors: can 1031 exchange proceeds be funneled into a syndication fund? Host Nathan Sosa and co‑host Tom Castelli explain that the tax code bars a direct swap of real‑property for a partnership interest, forcing sponsors to use specialized structures.

They break down the two primary workarounds. A Tenants‑in‑Common (TIC) lets an investor own a fractional share of the replacement property, sitting alongside the LP entity but not inside the partnership itself. A Delaware Statutory Trust (DST) operates as a trust that directly holds the asset, qualifying the investor as a direct owner under IRS Rev. 2004‑86. Both routes involve extra legal, accounting, and compliance layers, and they restrict the sponsor’s fee and promote structures.

Real‑world examples illustrate the hurdles: sponsors often set a minimum gain threshold—sometimes a million dollars—before entertaining a TIC or DST investor, citing higher admin costs and the risk of unintentionally creating a partnership that triggers penalties. The hosts note a 40% year‑over‑year rise in DST equity raises projected for 2025, underscoring growing market interest despite the complexity.

For investors, the takeaway is clear: leveraging 1031 capital in a syndication is possible but demands careful structuring and professional guidance. Sponsors must weigh the added expense and reduced compensation against the benefit of attracting large, passive capital, while investors need experienced CPAs to ensure compliance and preserve the tax deferral advantage.

Original Description

Can investors use 1031 exchange proceeds to invest in real estate syndications? The answer is yes, but it's not nearly as simple as many sponsors hope.

In this episode of the Major League Real Estate Podcast, Nate Sosa and Thomas Castelli break down the most common structures used to bring 1031 exchange capital into syndications, including Tenants in Common (TIC) arrangements, Delaware Statutory Trusts (DSTs), and 721 Exchange/UPREIT structures.

They discuss why 1031 investors are increasingly looking for passive investment options, the challenges syndicators face when accepting exchange capital, and the operational, legal, and tax considerations that come with each strategy.

- Request a free discovery meeting: go.therealestatecpa.com/mlre

- Get the Ultimate Guide for Real Estate Syndications: go.therealestatecpa.com/mlreultimateguide

- Submit your questions to: go.therealestatecpa.com/question

00:00 – Introduction

00:23 – Why Sponsors Want Access to 1031 Exchange Capital

01:50 – The Challenge: Why 1031 Money Can't Go Directly Into a Syndication

03:10 – Real Property vs. Partnership Interests Explained

04:14 – Strategy #1: Tenants-in-Common (TIC) Structures

05:29 – Why Most Sponsors Avoid TIC Investments

06:40 – Compensation, Compliance, and Administrative Challenges

07:34 – Rev. Proc. 2002-22 and TIC Compliance Rules

08:15 – Governance Issues and Sale Restrictions with TICs

09:47 – When a TIC Structure Might Make Sense

10:28 – Strategy #2: Delaware Statutory Trusts (DSTs)

12:00 – How DSTs Work for 1031 Exchange Investors

12:41 – Why DST Investments Are Growing in Popularity

13:28 – Typical DST Investment Properties and Return Profiles

14:38 – The Seven Deadly Sins of DSTs

15:12 – No Additional Capital Contributions After Closing

15:38 – Loan Restrictions and Refinancing Limitations

16:31 – Capital Expenditure and Operational Restrictions

17:10 – Why DSTs Require Stable, Long-Term Tenants

18:03 – Who Should Consider a DST Strategy?

18:34 – Strategy #3: 721 Exchanges and UPREITs

19:36 – How 721 Exchanges Differ from 1031 Exchanges

20:32 – Understanding UPREIT Structures

21:31 – Estate Planning Benefits of UPREITs

22:15 – Why 721 Structures Are Limited for Most Sponsors

22:58 – Comparing TICs, DSTs, and 721 Exchanges

24:10 – The Gray Area: Converting TIC Interests Into Syndications

25:18 – Key Takeaways and Final Thoughts

The Major League Real Estate podcast is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, investing, financial, or accounting advice. Information on the podcast may not constitute the most up-to-date legal or other information. No reader, user, or listener of this podcast should act or refrain from acting on the basis of information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this podcast or any of the links or resources contained or mentioned within the podcast show and show notes do not create a relationship between the reader, user, or listener and podcast hosts, contributors, or guests. Any mention of third-party vendors, products, or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging with any vendor.