Yes, you can use a 1031 Exchange to purchase a fractional ownership interest in real estate. However, the exchange must meet specific criteria set by the IRS, which requires the fractional interest to be in a property, not a business entity, and that the replacement property is of equal or greater value.
Fractional real estate ownership allows multiple investors to hold a share in a single property. Two common structures for this type of ownership are Tenant-in-Common (TIC) and Delaware Statutory Trust (DST). These structures enable investors to access larger properties, such as commercial real estate, by sharing both the costs and any generated income.
When using a 1031 Exchange to buy fractional real estate interests, the following criteria must be met:
• Like-kind property: The new fractional interest must qualify as like-kind property.
• Value criteria: The replacement property value must be equal to or greater than the relinquished property.
• Investment property: The property must be held for investment purposes, not personal use.
• Exchange deadlines: Adhere to the IRS deadlines of 45 days for identifying and 180 days for completing the transaction.
• Benefits:
• Access to larger investments: Small-scale investors can own interest in large-scale properties.
• Diversification: Ability to diversify investment portfolios by investing in a range of property types.
• Professional management: Typically, properties are professionally managed, reducing the investor's operational burdens.
• Risks:
• Limited control: Investors have minimal control over property decisions.
• Illiquidity: Real estate investments are generally illiquid, with potential delays in selling interests.
• Market conditions: Property values can fluctuate based on market dynamics.
Yes, Delaware Statutory Trusts (DSTs) are eligible for 1031 Exchanges. DSTs allow investors to buy fractional interests in properties, facilitating investment diversification and professional management.
A Tenant-in-Common (TIC) structure allows individual investors to share ownership in a property without forming a legal partnership, making it better suited for 1031 Exchange continuity while maintaining individual real estate interests.
Failing to adhere to the 45-day identification and 180-day transaction completion deadlines can disqualify the exchange, resulting in the recognition of capital gains tax on the sale of the relinquished property.