Drop and Swap: 1031 Exchanges for Partnerships, LLCs and Trusts

Key takeaways

• The taxpayer that sells must be the taxpayer that buys. A single-member LLC or a revocable living trust usually counts as you. A multi-member LLC, a partnership, a corporation or an irrevocable non-grantor trust is its own taxpayer.
• A partnership interest isn't real property, so a member can't exchange their share of the LLC. The partnership exchanges as a whole, or not at all.
• A drop and swap can let owners go separate ways. Its main risk is the held-for-investment test, so timing and how the co-owners actually behave after the "drop" matter a great deal.
• Exchanges with family members or with entities you control by more than 50% are related-party exchanges. If either side disposes of the property within two years, the deferral can be lost.
• Divorce, death and disagreements among partners all raise the same questions about who owns what. They're easier to solve well before a sale than a week before.
• This guide is general education, not tax or legal advice. Plan any restructuring with a tax attorney, your CPA and your qualified intermediary.

Why does the same taxpayer have to sell and buy?

A 1031 exchange lets you sell investment or business real estate and buy other investment or business real estate without paying tax on your gain right away. The tax is deferred, not forgiven. My guide to the 1031 exchange rules and timeline covers the deadlines and the money flow.

The exchange belongs to a taxpayer. The tax code speaks of gain recognized "to the taxpayer." So the taxpayer that sells the old property, called the relinquished property, generally has to be the taxpayer that buys the new property, called the replacement property. People call this the same-taxpayer rule.

The rule is about tax identity, not the exact name on the deed. That's good news in some cases and bad news in others.

Who counts as a taxpayer?

Here's a quick way to think about common owners.

• You as an individual are a taxpayer.
• Spouses are generally treated as separate taxpayers for this purpose, even if they file a joint return.
• A single-member LLC is usually ignored for income tax. The IRS says "an LLC with only one member is treated as an entity disregarded as separate from its owner" unless it elects to be taxed as a corporation, on its single-member LLC page. A disregarded entity is one the IRS treats as part of its owner.
• A multi-member LLC is, by default, a partnership. The same IRS page says "A domestic LLC with at least two members is classified as a partnership for federal income tax purposes."
• A partnership is its own taxpayer for this purpose. It files its own return and passes income through to its partners on a Schedule K-1, an annual tax form that reports each partner's share.
• A corporation is its own taxpayer.
• A revocable living trust is usually treated as you while you're alive.
• An irrevocable trust may or may not be treated as you, depending on how it's written.

Who can buy after a given seller sells?

This table shows how the rule usually plays out. It's general, and your facts can change the answer.

Can an LLC do a 1031 exchange?

Yes. An LLC can do a 1031 exchange as long as the same LLC, or the same taxpayer, sells and buys. The question is what kind of LLC you have.

Single-member LLCs

A single-member LLC that hasn't elected to be a corporation is disregarded. For the exchange, it's you. You can sell a property you own personally and buy the replacement in your single-member LLC. You can also do the reverse.

Lenders often want a borrower to be a new single-purpose LLC. If you form a new single-member LLC to take title to your replacement, that usually still works, because the new LLC is also disregarded. Confirm it with your CPA and your qualified intermediary, or QI, the company that holds your sale money during the exchange, before closing.

Multi-member LLCs taxed as partnerships

This is where most of the trouble lives. When an LLC with two or more members sells, the LLC is the taxpayer. The LLC has to buy the replacement property, and the LLC holds it afterward.

That works well when every member agrees. Everyone stays in the LLC, the LLC trades up, and everyone keeps the same percentages. It works badly when members want different things.

The reason is simple. A member owns an interest in the LLC, not a slice of the building. An interest in a partnership isn't real property. The IRS fact sheet on like-kind exchanges lists "Partnership interests" among property that doesn't qualify. So a member can't sell their LLC interest and do their own exchange with the money. My guide to what counts as like-kind property explains the real property tests in full.

A narrow exception for co-owners who elect out

There's one exception in the statute. Section 1031(e) treats an interest in a partnership with a valid election under Section 761(a), which excludes it from all of the partnership tax rules, "as an interest in each of the assets of such partnership."

Section 761(a) lets certain groups elect out of the partnership tax rules. The group must be "availed of" "for investment purposes only and not for the active conduct of a business." The regulation at 26 CFR §1.761-2 adds that the members must "Own the property as co-owners" and "Reserve the right separately to take or dispose of their shares."

That election doesn't fit most operating LLCs, and it has to be in effect properly. It's a question for a tax attorney, not a do-it-yourself fix.

LLCs taxed as corporations

If your LLC elected to be taxed as a corporation, the corporation is the taxpayer. It can exchange its own property. Its shareholders can't exchange the corporation's property, and moving property out of a corporation can trigger tax of its own.

What is a drop and swap?

A drop and swap is the most common way partners try to split up around a sale. It has two steps.

1. The drop. Before the sale, the partnership deeds the property out to its members. Each member receives an undivided percentage of the property as a tenant in common, or TIC. A TIC owner holds a direct, deeded share of real estate alongside other owners.
2. The swap. At the sale, each co-owner decides separately. One can exchange their share into new property. Another can take cash and pay tax. A third can exchange into something different.

The idea works because a TIC share is real property, while an LLC interest isn't. Once the drop is done, each owner has something they can exchange on their own.

Is the drop itself taxable?

Usually not, under the partnership rules. Section 731(b) says "No gain or loss shall be recognized to a partnership on a distribution to a partner of property, including money." Under Section 731(a), a partner generally recognizes gain on a distribution only to the extent money received exceeds their basis in the partnership. Your basis in the partnership is, roughly, your tax investment in it.

There are exceptions. They involve property contributed by a partner, partnership debt, and certain other assets. Your CPA should check them before the deed is recorded.

The big risk: the held-for-investment test

Section 1031 covers real property "held for productive use in a trade or business or for investment." The test applies to the property you sell and the property you buy. After a drop, each co-owner has to show they held their TIC share for investment.

That's hard to show if the drop happened days before closing a sale the partnership had already negotiated. A tax agency can argue the co-owners held their shares only to sell them right away, not for investment.

There's a second argument, too. The IRS can claim the partnership really made the sale and the members were just a conduit. The Supreme Court's decision in Commissioner v. Court Holding Co. (1945), a case about a corporation and its shareholders, is often cited for that idea. The Court said "The incidence of taxation depends upon the substance of a transaction." It also said "A sale by one person cannot be transformed for tax purposes into a sale by another" "by using the latter as a conduit through which to pass title."

There's no IRS safe harbor that blesses a drop and swap. Courts have decided these cases on their facts. So the planning focuses on making the facts look like what they are: real co-ownership, held for investment, for a real period of time.

What makes a drop and swap stronger or weaker

These factors tend to help or hurt. No single one decides the outcome.

On that last row, the Treasury rule on entities matters. Under 26 CFR §301.7701-1, "mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity." But the same rule says co-owners of an apartment building who also provide services to occupants can create a separate entity. If your TIC acts like a partnership, the IRS may treat it as one.

What the IRS's TIC guidance says about partnerships

The IRS has published guidance on when it will rule that a group of co-owners isn't a partnership. It's Revenue Procedure 2002-22. Its conditions "are not intended to be substantive rules" and "are not to be used for audit purposes." So it's not a test you must pass.

But one line speaks directly to drop and swaps. The IRS says it "generally will not issue a ruling under this revenue procedure if the co-owners held interests in the Property through a partnership or corporation" right before forming the co-ownership. That tells you the IRS views restructurings from a partnership into co-ownership with care.

The same revenue procedure says the co-ownership "may not file a partnership or corporate tax return" or "otherwise hold itself out as a partnership." Those are useful habits for any TIC after a drop. My guide to DST vs. TIC ownership explains how TIC structures work in more depth.

How does a drop and swap work, step by step?

This is the general order of work. Every step should be planned with a tax attorney and your CPA. The earlier you start, the stronger your position.

Step 1: Find out what each owner wants

Ask every member what they want from a future sale. Cash, a new property, a passive investment, or a buyout? Write it down. Disagreement is normal. Surprise at closing is the real danger.

Step 2: Read the operating agreement

The operating agreement is the LLC's governing contract among its members. Check how the LLC can distribute property, how votes work and whether any member can block a sale. Look for buy-sell clauses, rights of first refusal and transfer limits.

Step 3: Talk to the lender

Most commercial loans bar transfers without the lender's consent. Deeding the property to members can trigger a due-on-sale clause, a loan term that lets the lender demand full repayment if the property is transferred. Ask what the lender needs, and what it will cost, before you record anything.

Step 4: Have a tax attorney design the structure

The attorney decides whether a drop and swap makes sense, or whether another option fits better. They'll also look at the partnership rules on distributions, debt and contributed property.

Step 5: Do the drop early

Record deeds that give each member their TIC share. Sign a tenancy-in-common agreement that covers management, expenses and decisions. Update insurance, property tax bills and leases as needed.

Step 6: Operate as co-owners

Each co-owner reports their own share of income and expenses. The old LLC stops filing a partnership return for the property, if that's what your tax professional recommends. Keep separate records.

Step 7: Market and sell

Each co-owner signs the sale contract for their own share. Co-owners who want to exchange each sign their own exchange agreement with a QI.

Step 8: Each owner completes their own exchange

If you're exchanging, you identify replacement property in writing within 45 days. You close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. Owners who take cash report their gain.

What is a swap and drop?

A swap and drop flips the order. The partnership does the exchange first, as one taxpayer. Later, it distributes the replacement property to its members, who then go their separate ways.

The appeal is that the sale itself is clean. The partnership sold, and the partnership bought. The risk moves to the back end. The partnership has to hold the replacement property for investment. If it hands the property to its members right after buying it, the IRS can argue the partnership never held it for investment.

Swap and drops raise the same timing questions as drop and swaps. The longer the partnership holds the replacement before the distribution, the stronger the facts tend to be.

Drop and swap vs. swap and drop vs. other options

Here's how the main choices compare. These are general features. Your attorney will weigh them against your facts.

More about dividing a partnership

A partnership can sometimes divide into two or more partnerships. The Treasury rule at 26 CFR §1.708-1(d) covers how divisions work for tax purposes. A resulting partnership whose members held more than 50% of the old one "shall be considered a continuation of the prior partnership."

In theory, members who want to exchange can end up in one partnership and members who want cash in another. Each partnership is then its own taxpayer. In practice, this is complex and fact-specific. It still raises the question of whether each new partnership held its property for investment. Treat it as a tool for your tax attorney.

What can partners do when they disagree?

Disagreement is the normal case, not the exception. Partners are often at different stages of life. One may be 45 and want to keep building. Another may be 75 and want income and simplicity. A third may need cash.

Here are the most common paths, in plain terms.

Path 1: Everyone stays together

The partnership sells and exchanges as one taxpayer. Members who don't love the replacement stay in for now. This works when the disagreement is mild, and when the operating agreement gives members a way out later.

Path 2: Buy out the member who wants cash

The partnership, or the other members, buy out the departing member well before the sale. The departing member pays tax on their gain from selling their LLC interest. The remaining members keep the partnership intact and exchange as a group.

The challenge is finding the cash. The partnership may need to borrow, or the remaining members may need to use their own money.

Path 3: The partnership takes some cash

The partnership exchanges most of the proceeds and keeps some cash. That cash is boot, meaning anything received in an exchange that isn't like-kind real property. Boot is generally taxable. My guide to partial exchanges and boot explains how it's figured.

The catch is who pays the tax. The partnership's gain flows to its members under the partnership agreement and the partnership tax rules. Whether the taxable gain can be steered to the member who got the cash depends on how the agreement is written and on rules your CPA will apply. Don't assume it can.

Path 4: A drop and swap

Each member gets a TIC share, then goes their own way at the sale. This gives the most freedom. It also carries the most tax risk if it's rushed.

Path 5: Exchange into something that splits more easily

Some groups exchange into replacement property that's easier to divide later. A Delaware statutory trust, or DST, is a trust that owns real estate and sells interests in it to investors. Under IRS Revenue Ruling 2004-86, a taxpayer "may exchange real property for an interest in the Delaware statutory trust" described there, "if the other requirements of § 1031 are satisfied." So a properly structured DST interest can qualify as replacement property.

After a drop, each co-owner can buy their own DST interests with their own exchange money. They no longer need to agree on anything with each other. Each owns a separate interest, picked for their own goals. My complete guide to Delaware statutory trusts explains how they work.

DST interests are securities with real risks. They're illiquid, you have no control over the property, distributions are not guaranteed, and you can lose your entire investment. Most are offered only to accredited investors, which generally means people who meet SEC income or net worth tests. My guide to accredited investor rules has the details, including the separate tests for trusts and entities.

Can a trust do a 1031 exchange?

Yes. A trust can do a 1031 exchange. The question is whether the trust is its own taxpayer or is treated as you.

Revocable living trusts

A revocable living trust is a trust you can change or cancel during your life. Many people hold rentals in one to avoid probate, the court process for settling an estate. For income tax, it's usually treated as you.

Section 676 says "The grantor shall be treated as the owner of any portion of a trust" where the power to take the property back can be used by the grantor or a non-adverse party, meaning someone without a stake that would be hurt by using it. The grantor is the person who created and funded the trust. A trust treated this way is called a grantor trust.

So a sale by your revocable trust and a purchase in your own name usually count as the same taxpayer. The reverse works too. Many people still keep title the same on both sides to avoid questions.

Irrevocable trusts

An irrevocable trust generally can't be changed or cancelled once it's set up. Some are written so the grantor is still treated as the owner for income tax. Others aren't.

A trust that isn't a grantor trust is its own taxpayer. Section 641 applies the income tax "to the taxable income of estates or of any kind of property held in trust." That kind of trust can do its own exchange, with the trustee signing. It must buy the replacement in the trust's name, and it can't use your personal sale money.

If you're the grantor of an irrevocable trust that's treated as a grantor trust, whether you and the trust count as one taxpayer is a question for your estate attorney. Don't move property in or out of a trust in the middle of an exchange without advice.

What if an owner dies during an exchange?

Section 1031 and its regulations don't directly address this. An estate or successor trustee may be able to finish the exchange in some situations, but that depends on the facts and on your attorney's advice. Call your attorney and your QI right away.

Death also changes the bigger picture. Under Section 1014, property passing from someone who dies generally takes a basis equal to "the fair market value of the property at the date of the decedent's death." That can wipe out the deferred gain for heirs under current law. My guide to the step-up in basis covers how that works.

Trustees have rules of their own

A trustee must follow the trust document and state trust law. Some trusts limit what kinds of assets the trustee can buy, or require a co-trustee's sign-off. Check those limits before you identify replacement property, not after.

How do related-party rules affect a 1031 exchange?

A related-party 1031 exchange is one where you trade property with a family member or an entity you're closely tied to. These exchanges are allowed, but they come with a two-year string attached.

The two-year rule

Under Section 1031(f)(1), if you exchange with a related person and either of you disposes of the property within two years, the deferral is lost. The gain becomes taxable as of the date of that later disposition.

Section 1031(f)(2) lists three exceptions. A disposition doesn't count if it happens after the death of either party. It doesn't count if it's an involuntary conversion, such as a condemnation, and the exchange came before the threat of it. It also doesn't count if you show that avoiding federal income tax wasn't a principal purpose of the exchange or the later disposition.

The Form 8824 instructions add a filing duty: "Also file Form 8824 for the 2 years following the year of a related party exchange."

Who counts as related?

Section 1031(f)(3) points to two other sections. Here are the relationships most likely to matter in real estate.

Section 267(c)(4) defines family as "brothers and sisters" (whole or half blood), "spouse, ancestors, and lineal descendants." In-laws, cousins, aunts and uncles aren't on that list. But the tax code also counts ownership through other people and entities, so a relationship can show up indirectly. Your CPA should check every party. Partnership ties are in Section 707(b)(1).

The bigger trap: buying from a related party

The two-year rule is about swapping with a relative. A harder problem comes up when you sell to an outsider and buy your replacement from a relative.

Section 1031(f)(4) says the section "shall not apply to any exchange which is part of a transaction" structured to avoid the related-party rules. The IRS applied that in Revenue Ruling 2002-83.

In that ruling, a taxpayer sold low-basis property to an unrelated buyer through a qualified intermediary. The QI then bought the replacement from the taxpayer's related party, who received cash. The IRS held the taxpayer "is not entitled to nonrecognition treatment under § 1031(a)" if "the related party receives cash or other non-like-kind property for the replacement property."

The logic is simple. The family as a whole ended up cashing out of real estate, and the low-basis gain was never taxed. Using a QI didn't change that.

Exchanges with a relative generally need both sides to hold for two years, and buying replacement property from a relative is riskier still. Ask your tax attorney first.

Related-party issues inside partnerships

Partnership deals often involve related parties without anyone noticing. A partnership and a member who owns more than half of it are related. Two LLCs owned by the same family can be related. A buyout of one sibling by another is a related-party transaction.

Before you buy property from, or sell property to, anyone connected to your partnership, map the ownership. Then have your CPA check it against the rules above.

What happens to a 1031 exchange in a divorce?

Divorce raises the same core question: who is the taxpayer, and who owns what? Here are the main points, in general terms.

Spouses are separate taxpayers

Spouses are generally treated as separate taxpayers for this purpose, even when they file jointly. If both spouses are on title to the property you sell, both generally need to be on title to the replacement for a full exchange. If the marriage is ending, that may be the last thing either spouse wants.

Co-owned rentals can sometimes split at the sale

If a couple owns a rental directly as co-owners, and not through a partnership, each spouse owns their own share. In that case, each spouse can often treat their own share separately at the sale. One spouse could exchange their share through their own QI account while the other takes cash and pays tax.

How the property is titled matters a lot here. So does state property law, especially in community property states. If the couple owns the rental through an LLC, the LLC may be the taxpayer, and the partnership rules above apply. Your family-law attorney and CPA should work together on this.

Transfers between spouses incident to divorce

Section 1041 says "No gain or loss shall be recognized" on a transfer of property to a spouse, or to a former spouse if the transfer is "incident to the divorce." That includes a transfer that "occurs within 1 year after the date on which the marriage ceases," or one "related to the cessation of the marriage."

The spouse who receives the property takes "the adjusted basis of the transferor." Their holding period, meaning how long they're treated as owning it for tax purposes, generally includes the time the other spouse owned it, under Section 1223(2).

So one common approach is for one spouse to take the rental in the settlement, keep it as an investment, and later sell it in their own exchange. Section 1041 itself is not a 1031 exchange. It just moves the property and its built-in gain from one spouse to the other.

Why DSTs come up in divorce planning

Dividing one building between two people who no longer want to own anything together is hard. Some couples use the sale to separate cleanly. Each spouse exchanges their own share into their own replacement property. That can include separate DST interests, so neither spouse has to co-own anything with the other afterward.

DST interests themselves are hard to split later. Transfers usually require sponsor consent, and there's no public market. That's one more reason to divide ownership before you buy, not after.

Worked example: three LLC members who want different things

This is a hypothetical example with simple round numbers. It doesn't describe any real client, property or offering. The numbers aren't typical of any offering. Your CPA and attorney should run your real figures.

The setup

Say three people own a small apartment building through an LLC taxed as a partnership.

• Ana owns 50%. She wants to keep owning real estate and would like a larger building.
• Ben owns 30%. He's tired of being a landlord and wants something passive.
• Cara owns 20%. She wants cash for a business.

The LLC's adjusted basis in the building is $1,000,000. Adjusted basis is roughly what was paid, plus improvements, minus depreciation taken. A buyer will likely pay $3,000,000. To keep it simple, there's no loan and no selling cost. The LLC's gain would be $2,000,000.

If gain is shared by ownership percentage, the members' shares of that gain are about $1,000,000 for Ana, $600,000 for Ben and $400,000 for Cara.

Option A: the LLC exchanges and keeps cash for Cara

The LLC buys a $2,400,000 replacement building and keeps $600,000 of cash for Cara. The $600,000 is boot. About $600,000 of the LLC's gain is taxable.

Here's the problem. If the operating agreement shares gain by percentage, Ana and Ben are allocated part of that taxable gain even though Cara gets the cash. Ben also stays in an LLC that owns a building he'd rather not own.

Option B: a drop and swap, done early

Well before any sale talks, the LLC deeds the building to Ana, Ben and Cara as co-owners. They sign a TIC agreement, hire a manager, and report their own shares. This example assumes each member's basis in their share equals their percentage of the LLC's $1,000,000 basis. The partnership rules decide the actual figure, so your CPA should confirm it.

Later, they sell. Each one's share of the $3,000,000 price matches their percentage.

Each person gets their own outcome. Cara pays tax only on her own gain. Ana and Ben defer theirs, if their exchanges meet all the rules.

The risk is the timing and the facts. If the drop happened the week before closing, the IRS could argue the LLC really made the sale. Then the whole plan could unravel.

Option C: buy Cara out first

Well before the sale, Ana and Ben buy Cara's 20% LLC interest for $600,000, in proportion to their current shares. Cara reports gain on selling her LLC interest. If her basis in the LLC is $200,000, her gain is about $400,000. Ana and Ben then own the LLC 62.5% and 37.5%.

The LLC later exchanges the whole building. Ben still owns his share through the LLC, and he still wants out. Ana and Ben may need a second plan for that, such as a later drop and swap.

What the example shows

Every option works on paper. Each one moves the tax, the timing or the risk to a different person. The time to choose is before anyone signs a letter of intent.

Mistakes to avoid with entity-owned property

These are common and avoidable.

1. Waiting until there's an offer. A drop and swap done under contract is the weakest version. Start planning well ahead, with your tax attorney.
2. Changing title mid-exchange. Selling as an LLC and buying as individuals, or the reverse, can break the same-taxpayer rule.
3. Adding a member to a single-member LLC. A second member can turn a disregarded LLC into a partnership, which is a different taxpayer.
4. Ignoring the lender. Deeding property out of an LLC can breach your loan. Get consent first.
5. Operating the TIC like the old partnership. Same bank account, same partnership return and the same manager making every decision can make the co-ownership look like a partnership.
6. Assuming boot will land on the partner who took the cash. That depends on the partnership agreement and the tax rules.
7. Buying replacement property from a relative. Revenue Ruling 2002-83 shows how that can fail.
8. Forgetting the two-year clock. If you exchange with a related party, track both properties for two years and file the extra forms.
9. Moving property into or out of a trust mid-exchange. Wait until the exchange is complete, and get advice.
10. Leaving divorce terms vague. Spell out who owns what, and when, before the sale.
11. Choosing a replacement only to solve a people problem. A DST or TIC can help owners separate, but it must still fit each owner's goals and risk tolerance.

Risks and limits to keep in mind

Exchanges involving entities carry extra layers of risk.

• Tax challenge risk. A drop and swap or swap and drop can be challenged. If the challenge succeeds, the gain can become taxable, often with interest and penalties.
• State tax risk. State tax agencies can apply their own reviews to restructurings. Ask your CPA about your state.
• Related-party risk. A later sale by either party within two years can undo the deferral.
• Lender risk. Transfers without consent can trigger loan defaults.
• Relationship risk. Co-owners who don't get along can deadlock on decisions.
• Tax-law risk. Congress can change Section 1031, the partnership rules or the step-up in basis.

Each co-owner who buys DST interests after a split takes on the risks of a security, separately from the other owners.

• Your money is tied up. There's generally no way to sell a DST interest before the sponsor sells the property. The SEC's bulletin on private placements warns that investors "should be prepared to hold the securities indefinitely."
• You could lose it all. The value of your interest can fall, and you can lose your entire investment.
• Income can stop. Distributions are not guaranteed, and the sponsor can cut or suspend them.
• You give up a say. Unlike a TIC co-owner, a DST investor has no vote on leases, loans or when to sell.
• Costs and leverage add up. Fees lower what you keep, and any debt in the trust magnifies losses.
• Not everyone can buy. Most DST offerings are limited to accredited investors, and each former partner has to qualify on their own.

How I help owners who are splitting up a property

When co-owners go separate ways, each owner who chooses to exchange needs a plan for their own share, and that's where my team and I can help. My path into this work ran through real estate acquisitions, management and development, and I've been involved in more than $10 billion of real estate investment activity, as my background page describes.

Each exchanging owner works with us on their own. It starts with an introductory call about that owner's share of the sale, their part of any loan being paid off, and their goals. From there, we go through possible replacements together, and I explain why an offering is on my list, what I like about it and where I have reservations. The DST offerings available now are on the site. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

The restructuring itself, including any drop and swap, is work for your tax attorney and CPA, and the exchange runs through your qualified intermediary. I don't fill any of those roles.

What my data shows

When owners split up, each one often has a different amount to place, and some want to stay invested for a long time. Here's what my offering records as of October 2026 show: 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They aren't a forecast or a promise about any future offering.

Minimums can fit smaller shares

When three or four co-owners split one sale, each person's share can be modest. In my offering records as of October 2026, the median minimum investment is $100,000. Minimums range from $25,000 to $500,000, and 21 offerings (28%) start at $25,000.

That matters for owners with smaller shares. A co-owner with a few hundred thousand dollars to place may be able to spread it across more than one offering. Each owner still has to meet the offering's investor rules.

Many offerings include a path into a partnership

This point connects directly to the partnership rules above. A 721 exchange is a tax rule that lets you contribute property to a partnership for an interest in it without current tax. In DSTs, it usually means a REIT's operating partnership may later acquire the DST property for OP units. A REIT is a company that owns income-producing real estate. OP units are interests in the partnership that owns the REIT's properties.

OP units are partnership interests. Like an LLC interest, they can't be used in a later 1031 exchange. So the 721 feature matters if you might want to exchange again.

These figures come from my offering records as of October 2026. My 721 exchange guide explains that path and its trade-offs.

Debt and hold periods

In my offering records as of October 2026, 36 of 76 offerings (47%) are all-cash, with no debt. Another 16 (21%) have loan-to-value above 50%. Loan-to-value, or LTV, is the loan divided by the property's value. Among offerings that use debt, the median LTV is about 49%.

That matters when co-owners pay off a shared loan at the sale. Each exchanging owner may need to replace their share of that debt, with new debt or added cash, to defer all their gain.

In my offering records as of October 2026, a 10-year projected hold is the most common, at 31 offerings. Owners who split up should expect each new investment to have its own long timeline.

Frequently asked questions

Can my LLC sell a property and buy the replacement in my own name?

Only if it's a single-member LLC that's disregarded for income tax, because then you and the LLC count as one taxpayer. A multi-member LLC is a partnership by default, so the same LLC has to buy the replacement. Confirm the title plan with your CPA and qualified intermediary before closing.

Can one member of an LLC do their own 1031 exchange?

Not with an LLC interest, because a partnership interest isn't real property. A member who wants their own exchange usually needs the LLC to restructure first, such as through a drop and swap. That restructuring should be planned well before any sale with a tax attorney.

How long before a sale should a drop and swap happen?

The tax code sets no specific period. The earlier the drop, and the more the co-owners act as real co-owners, the stronger the case that they held their shares for investment. There's no safe waiting period, so your tax attorney should set the timing for your facts.

Is a drop and swap legal?

Restructuring ownership is legal, and there's no rule that bans a drop and swap. The risk is that the IRS or a state can challenge whether each owner held their share for investment, or argue the partnership really made the sale. That's why timing and documentation matter so much.

Can I sell from my living trust and buy the replacement in my own name?

Usually, yes. A revocable living trust is generally treated as you for income tax, so the sale and the purchase count as one taxpayer. An irrevocable non-grantor trust is different, because it's its own taxpayer and must sell and buy in its own name.

Can I do a 1031 exchange with a family member?

Yes, but if either of you disposes of the exchanged property within two years, the deferral is generally lost. There are exceptions for death, involuntary conversions and cases with no tax-avoidance purpose. Buying replacement property from a relative is riskier still, so get advice first.

Is my sibling's LLC a related party?

It can be. Siblings are family under Section 267, and ownership through an entity can make the entity related to you, too. Have your CPA map the ownership before you buy from or sell to any family entity.

What happens to our rental when we divorce?

Transfers between spouses incident to divorce generally aren't taxable under Section 1041, and the receiving spouse keeps the old basis. If you co-own the rental directly, each spouse can often handle their own share at a sale. Your family-law attorney and CPA should plan it together.

Can co-owners each buy different DSTs after a drop and swap?

They can. After a drop, each co-owner can exchange their own share into their own replacement property, and a properly structured DST interest can qualify. Each owner must meet the offering's investor rules, and DST interests are illiquid securities with real risks.

What is the difference between a drop and swap and a swap and drop?

In a drop and swap, the partnership distributes the property first and the owners exchange separately. In a swap and drop, the partnership exchanges first and distributes the new property later. Both face questions about whether the property was held for investment.

Before you act

This guide reflects federal law and IRS guidance as of October 2026. It's general education, not tax, legal or investment advice for your situation. Please confirm any restructuring and exchange with your tax attorney, your CPA and your qualified intermediary before you act. DST interests are offered only through a private placement memorandum, are illiquid, and can lose value, including your entire investment.

Sources

• 26 U.S.C. §1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 U.S.C. §761, Terms defined (Cornell LII)
• 26 CFR §1.761-2, Exclusion of certain unincorporated organizations from the application of all or part of subchapter K (Cornell LII)
• 26 U.S.C. §731, Extent of recognition of gain or loss on distribution (Cornell LII)
• 26 CFR §301.7701-1, Classification of organizations for federal tax purposes (Cornell LII)
• 26 CFR §1.708-1, Continuation of partnership (Cornell LII)
• 26 U.S.C. §676, Power to revoke (Cornell LII)
• 26 U.S.C. §641, Imposition of tax on estates and trusts (Cornell LII)
• 26 U.S.C. §1014, Basis of property acquired from a decedent (Cornell LII)
• 26 U.S.C. §267, Losses, expenses, and interest with respect to transactions between related taxpayers (Cornell LII)
• 26 U.S.C. §707, Transactions between partner and partnership (Cornell LII)
• 26 U.S.C. §1041, Transfers of property between spouses or incident to divorce (Cornell LII)
• 26 U.S.C. §1223, Holding period of property (Cornell LII)
• Commissioner v. Court Holding Co., 324 U.S. 331 (1945) (Cornell LII)
• IRS Revenue Procedure 2002-22
• IRS Revenue Ruling 2002-83, Internal Revenue Bulletin 2002-49
• IRS Revenue Ruling 2004-86
• IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Code Section 1031
• IRS, Instructions for Form 8824 (2025)
• IRS, Single Member Limited Liability Companies
• Investor.gov, Private Placements under Regulation D