Can I split my exchange between a DST and a property I buy directly?

The identification rules count a trust as one property, exactly like the building

Treas. Reg. §1.1031(k)-1(c)(4)(i) lets you identify "three properties without regard to the fair market values of the properties." A beneficial interest in a named Delaware statutory trust occupies one of those slots; it does not occupy several because the trust owns several buildings, and it does not occupy a fraction of one.

So the standard mixed list is the building you are under contract on, plus two trusts behind it. That is three names, at the limit, with no value test to worry about.

Describe each leg in its own idiom: the building by street address or legal description, the trust by its full legal name and the dollar amount or percentage of the interest you intend to take. How to properly identify replacement property covers the form and delivery of the notice itself.

Close the deeded purchase first, because only the subscription can be resized afterwards

This is the whole trick of a split exchange. A building's final settlement figure is not the contract price: prorations, credits for repairs, tax adjustments and lender charges move it in the last forty-eight hours, and you find out what you actually spent on the day.

A subscription has no such drift. Once the deeded leg has settled you know the residual equity to the dollar, and the trust leg can be written for precisely that amount and wired by the intermediary in a separate disbursement.

Run it the other way and you are guessing. Subscribing first fixes the trust amount before the building's number is known, and any miss has to be absorbed by a purchase contract you can no longer change without renegotiating.

A trust takes an odd number where a building cannot — until the residual falls below the sponsor's minimum

The reason this pairing exists is that real estate does not come in the size of your leftover equity. No seller will convey $173,000 of a building, but a trust will accept a $173,000 subscription and issue a proportionate beneficial interest.

There is a floor, though, and it catches people. Offerings set their own minimum subscription, commonly quoted around $100,000 for exchange money, so a residual smaller than that may have nowhere to go.

A residual with nowhere to go is cash boot when the exchange period ends, taxed to the extent of your gain. If the deeded leg is going to leave $40,000 behind, decide before closing whether to push more of it into the building or to accept the tax; what happens to leftover cash sets out the consequence.

The two legs are added together before anything is tested

There is no requirement that the building alone match your sale, or that the trust alone carry the debt. Value, equity and debt are measured across everything you acquire in the exchange, so a lightly leveraged building can be paired with a leveraged trust, or the reverse.

That gives you a second dial. If your new lender will only advance 45% on the building, the shortfall in replacement debt can be made up by choosing a trust with higher leverage; how a DST's loan counts as replacement debt gives the formula for sizing it.

The aggregate test itself is not a DST question, and the exchange equation guide works through value, equity and debt in full.

Two subtractions tell you what the trust leg has to do

Work the residual out before you sign anything rather than after. Residual equity is whatever remains at the intermediary once the deeded closing has taken the cash it needs; residual debt is the mortgage you retired on the sale less the new loan the building actually ended up carrying.

Those two figures set the leverage the trust leg must supply, and the ratio is sensitive. A building financed more heavily than planned drives the required trust leverage down; a lender that trims its advance at the last minute drives it up, sometimes past what any available offering carries.

Do the sum twice, once against the contract assumptions and once against the lender's final commitment, because only the second number is the one the subscription has to match. A trust chosen against the first can miss by enough to leave real boot on the table.

• Residual equity = funds held by the intermediary, less the cash applied at the deeded closing.
• Residual debt = the mortgage retired on your sale, less the new loan placed on the building.
• Required trust leverage = residual debt divided by the sum of residual debt and residual equity.

One building, one trust, one exchange: the numbers in a hypothetical

Round hypothetical figures, and exchange expenses set aside for clarity. You sell for $2,500,000, the closing retires a $1,000,000 mortgage, and $1,500,000 reaches the intermediary. You must replace $2,500,000 of value and $1,000,000 of debt.

The deeded leg settles first at $1,600,000, with a new $700,000 loan and $900,000 of exchange equity. That leaves $600,000 of equity at the intermediary and $300,000 of debt still unreplaced.

The trust leg is then sized to fit: $600,000 into an offering at roughly one-third leverage is allocated about $300,000 of debt and $900,000 of replacement value. Value totals $2,500,000 and debt totals $1,000,000, and nothing is returned to you. Check your own version of this with your CPA or attorney before either closing.

Wanting four names on the list changes which rule you are under

Go past three and the three-property rule is gone. You then need the 200-percent rule, under which any number of properties may be identified "as long as their aggregate fair market value" does not exceed twice the value of what you sold.

Identifying each trust by the dollar amount of the interest you intend to acquire, rather than by the trust at large, keeps that aggregate tied to what you will actually buy. It is also what paragraph (c)(3) is asking for when it requires an unambiguous description.

Blowing both rules leaves only the 95-percent exception, which requires you to receive identified property worth "at least 95 percent of the aggregate fair market value of all identified replacement properties" — a test you pass by closing on almost everything you named. How many properties you can identify sets out all three routes.