Investors who want to 1031 exchange into a syndication will immediately encounter a few roadblocks. Doing a 1031 exchange into a syndication is not possible since the syndication (in most cases) is considered a security. The exchanger is trying to 1031 exchange from real property into a passive investment. Passive investments are securities. Trying to exchange from real property to a security does not meet the “like-kind” 1031 exchange requirement.
However, there is a route that real property investors can take to utilize the benefits of syndications while still qualifying for a 1031 exchange.
A Tenants In Common (TIC) is a type of shared real property ownership structure with at least two investors. Investors in a TIC hold title to property in the TIC. Interest and income can be of unequal amounts. So, one investor may have 20% ownership while the other has 80%.
Investors in a TIC can sell their interest. New investors can 1031 exchange into it. Existing investors in the TIC don’t have to sell their interest if one investor decides to sell. Each investor has independent control over how they eventually sell their interest. Also, each owner has full use of the property.
A disadvantage of a TIC is that when an owner passes (heirs may inherit the property) or sells their interest, you may not know who the new owners will be or what their intentions are. Financing can also be limited for TICs compared to traditional real estate loan options.
A syndicator finds properties, promotes them, and pools investor money together to invest in properties. The syndicator may also be the sponsor of the investment. They will usually put up a portion of the funds needed to acquire properties and then raise the remaining amount from investors.
Syndication of a TIC can be done through individual investments or a 1031 exchange. In the first scenario, individuals may purchase interest in the TIC. They then become owners of property in the TIC.
Investors who currently hold real property but want to 1031 exchange can also utilize TICs. But they need to be sure the TIC is not structured as a security since it would not be a “like-kind” exchange. As mentioned above, exchanging from real property into a security is not allowed under 1031 exchange rules.