What Are Fractional 1031 Replacement Properties?

What Are Fractional 1031 Replacement Properties?

Posted by on Sep 7, 2016


When we here at Realized use the terms “fractional 1031 properties” or “fractional 1031 investments,” we are NOT referring to timeshares, shared vacation home arrangements or other “fractional interest” properties. For Realized, “fractional 1031 investments” refers to co-ownership in one or more properties by multiple 1031 exchange investors.  Two ownership structures have been approved by the IRS for Fractional 1031 Investments, the  Delaware Statutory Trusts (DST) and Tenants-in-Common (TIC).  Realized coined the term Replacement Property Interests (RPI)™, which has the same meaning.

The concept of a Fractional 1031 Investment is analogous to a group of investors pooling their capital to purchase and own property through a limited  partnership or Limited Liability Company (LLC).  However, Fractional 1031 Replacement Property Investments use either a DST or TIC structure to qualify for 1031 exchanges, whereas partnerships and LLC do not.  

Now that the distinction is clear, why would an 1031 investor want to invest alongside other exchange investors versus owning a property on their own? Fractional 1031 Investments are an attractive option for many 1031 investors for the following reasons:

Speed and Ease. 1031 investors are often racing against the clock to meet the IRS timeframe requirements of an exchange. Fractional 1031 Investments are Pre-Packaged, meaning the DST or TIC already owns the property and the 1031 investor is simply purchasing ownership interests in that DST or TIC. 

Large, High-Value Properties. The DST or TIC usually owns properties that are otherwise beyond the reach of the individual investor’s exchange. For example, it could be a 300-unit apartment building or medical office complex.  

No Landlord Burden.  Fractional 1031 Replacement Properties are typically leased, managed and maintained by seasoned real estate operators that Pre-Packages the opportunity for the 1031 investors. This can offer the investor a passive income stream free from any on-going landlord duties.

Stable Income. Fractional 1031 Replacement Properties are typically “stabilized” assets with established operating histories, allowing the investor to more easily evaluate both the potential return and the risks.  Investors are usually offered a monthly or quarterly preferred return by the Sponsor.

Diversification. Investors can efficiently exchange into multiple Fractional 1031 Replacement Properties, allowing them to diversify by type of property and location.  This is attractive for many investors who would prefer not to have all of the 1031 equity invested in a single property.

While some of the requirements of Fractional 1031 Investments sound a bit technical, investing in them is relatively straightforward.  Often investors are able to complete their exchange in as little as a week, after they’ve identified the DST or TIC they want to reinvest in.   

To learn more, download our Investor's Guidebook to Fractional 1031 Replacement Properties.  Or, explore a variety of current DST offerings side by side on the the Realized Marketplace.

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