Guides

Fractional Real Estate Investing

Fractional real estate investing generally describes any structure where multiple investors each own a portion of a single property or portfolio rather than one owner holding the entire asset, and the legal form that fractional ownership takes generally determines both the investor's rights and whether the interest can be used in a Section 1031 exchange. A tenant in common, or TIC, structure is generally the most direct form of fractional ownership for exchange purposes, since each TIC owner generally holds an actual deeded percentage interest in the real property itself, appears on title, and generally shares proportionally in income, expenses, and any eventual sale proceeds; because a TIC interest generally represents direct ownership of real property, it generally qualifies as like-kind property for a 1031 exchange when structured correctly. A Delaware Statutory Trust, or DST, offers a related but distinct form of fractional ownership, where a trust generally holds legal title to the property and investors generally hold a beneficial interest in the trust rather than being on title directly, but when structured to meet Internal Revenue Service Revenue Ruling 2004-86, that beneficial interest is generally treated as an interest in real property for 1031 purposes as well, generally with fewer active management responsibilities than a TIC. Many newer online fractional real estate platforms use a different structure entirely, where investors generally purchase a fractional membership interest in an LLC that holds the property, similar in legal form to a small syndication, rather than a direct deeded or trust beneficial interest in the real estate. Because an LLC membership interest is generally treated as a partnership interest and Section 1031(a)(2)(D) generally excludes partnership interests from like-kind treatment, these LLC-based fractional platforms generally do not preserve 1031 exchange eligibility even though investors are, in an economic sense, fractionally owning real estate. This distinction matters most for San Diego, CA investors comparing fractional platforms after a sale, since a platform's marketing language around fractional ownership does not by itself indicate whether the underlying legal structure is exchange eligible. Fractional interests offered through TIC or DST structures may also be securities under certain circumstances, and LLC-based fractional platforms are typically securities offerings as well, so in all of these cases we do not sell securities and only provide introductions to licensed providers who are appropriately registered. We help investors compare the legal structure behind a fractional opportunity, not just the marketing description, before deciding whether it fits a 1031 exchange timeline. Educational content only. This is not tax, legal, or investment advice.