When it comes to using the proceeds from a 1031 exchange, real estate investors often face a decision between two popular structures: Tenant-in-Common (TIC) and Delaware Statutory Trust (DST). Both options allow for the deferral of capital gains taxes, but they come with distinct advantages and challenges. Understanding the differences between these two options will help you choose the one that aligns with your investment goals, risk tolerance, and management preferences.

What is a TIC?

A Tenant-in-Common (TIC) structure is an ownership model where multiple investors share ownership in a single property. Each investor holds a deed to the property and is entitled to a pro-rata share of the property’s income and any potential appreciation. TICs are often used in 1031 exchanges, allowing investors to defer capital gains taxes by reinvesting their proceeds into like-kind properties.

Pros of TIC:

• Control and Flexibility: One of the key benefits of TIC investments is the ability to choose properties that meet your specific investment criteria, whether that’s commercial, multifamily, or industrial real estate. Investors can also diversify their portfolios based on personal preferences.
• Increased Control: Depending on the agreement, some TIC investors may have full voting rights and control over property management. They may influence leasing decisions, property improvements, and the eventual sale of the asset.
• Liquidity at Exit: When it’s time to exit, TIC investors have more flexibility. They can either sell the property and pay capital gains taxes or reinvest in another like-kind property via another 1031 exchange, allowing them to keep deferring taxes.

Cons of TIC:

• Higher Minimum Investment: TIC investments often require a higher minimum investment, typically around $500,000, which could be a barrier for smaller investors. Additionally, there is a cap of 35 investors in a TIC, which can limit the size of the deal.
• Limited Diversification: Unlike DSTs, TICs typically involve investing in a single property, making it harder to achieve the same level of diversification across multiple assets or sectors.
• Stricter Lender Requirements: TIC investments often come with more stringent lending criteria, which may require more time and documentation.
• Tight 1031 Deadlines: TICs must meet the strict timelines required for 1031 exchanges—45 days to identify a replacement property and 180 days to close the deal—adding pressure on investors to move quickly.

What is a DST?

A Delaware Statutory Trust (DST) is a legal structure that allows multiple investors to pool their resources into a trust, which then holds title to real estate. DSTs are designed to provide a passive investment opportunity, where investors receive a fractional share of the trust’s income and appreciation, but the day-to-day management is handled by the trustee.

Pros of DST:

• Lower Minimum Investment: DSTs generally have a lower entry point, often starting at $100,000, making them accessible to a wider range of investors who may want to diversify their 1031 exchange proceeds.
• Passive Investment: DSTs are ideal for those looking for a hands-off investment. The trustee manages all aspects of the property, from leasing to eventual sale, allowing investors to simply collect income without involvement in operations.
• Diversification: DSTs often pool capital to acquire multiple properties, which provides immediate diversification across different real estate sectors and geographic regions, reducing the overall risk.
• No Closing Deadline Pressure: Unlike TICs, DSTs don’t face the same 1031 exchange deadlines for property acquisition, which allows investors more flexibility and reduces stress related to closing deals within the strict timeframes.

Cons of DST:

• Lack of Control: DST investors give up control over property decisions. The trustee handles all management, including acquisitions and operations, leaving investors with no say in the process.
• Limited Liquidity and Potential Taxable Events: DSTs typically have limited options for liquidity, and some structures, such as UPREITs, may trigger a taxable event when DST shares are converted into REIT shares. This could lead to taxes on the capital gains.
• Longer Holding Periods: DSTs often require investors to hold their investment for 7-10 years, which may not suit those looking for shorter-term opportunities or more flexibility.
• Sponsor’s Interests: Unlike TIC sponsors, who may have a financial interest in the property’s long-term success, DST sponsors earn fees upfront and do not typically share in the asset’s appreciation, which can lead to a potential misalignment of interests between the sponsor and the investors.

Which Option Is Right for You?

Choosing between a TIC and a DST largely depends on your investment preferences and goals.

• TIC might be a better fit if you want more control over your investment, are comfortable with higher minimum investments, and prefer the flexibility to make decisions on the property’s operations. TICs also offer more liquidity options when you exit.
• DST may be a great option if you prefer a passive, hands-off investment, have a lower capital threshold, and are okay with longer holding periods. DSTs also offer diversification across multiple properties, but investors must be comfortable giving up control.

Ultimately, both structures allow for tax deferral through a 1031 exchange, but the right choice for you depends on whether you value control, flexibility, or passive management. Carefully consider your investment goals and risk tolerance before making a decision.