Fractional Real Estate Investing

What This Includes

Fractional real estate investing allows multiple investors to share ownership of a single property or portfolio, but the legal form of that fractional ownership determines whether it can be used inside a 1031 exchange. Tenancy in Common, generally referred to as TIC, is the oldest and most direct fractional structure, giving each investor an undivided percentage interest in the deed itself, along with a proportionate share of income, expenses, and decision making rights, subject to the guidelines described in Internal Revenue Service Revenue Procedure 2002-22.

A Delaware Statutory Trust, or DST, is a newer fractional structure in which a trust holds legal title to the property and investors own a beneficial interest in the trust rather than a direct deed interest. Despite this indirect form, the Internal Revenue Service confirmed in Revenue Ruling 2004-86 that a properly structured DST interest is treated as a direct interest in real property for federal tax purposes, which allows it to qualify as like-kind replacement property in a 1031 exchange, provided the trust complies with a set of operating restrictions sometimes called the seven deadly sins, which limit activities like renegotiating leases or making major capital improvements once the offering is closed.

Other fractional structures, including membership interests in a limited liability company or units in a real estate syndication, are generally treated as partnership or entity interests rather than direct real property interests, and Internal Revenue Code Section 1031(a)(2) specifically excludes partnership interests from like-kind exchange treatment. This means an investor comparing fractional options for 1031 purposes needs to look past the marketing description of fractional ownership and confirm the underlying legal structure, since only TIC and properly structured DST interests are generally exchange eligible.

DST and TIC interests may be securities. We do not sell securities. We provide introductions to licensed providers only, and any specific fractional offering should be reviewed with a licensed provider and the investor's tax advisor before exchange proceeds are committed. We help Albuquerque, NM investors sort through fractional ownership options and confirm which ones actually preserve exchange eligibility.

What We Deliver

Explanation of TIC and DST legal structures and their exchange eligibility

Comparison of fractional structures that do and do not qualify for Section 1031

Introduction to licensed providers for TIC and DST offerings

Review of DST operating restrictions before an investment decision

Coordination with a Qualified Intermediary for fractional replacement property

Explanation of control and decision making differences between TIC and DST

Guidance on combining multiple fractional interests within one exchange

Coordination with the investor's tax and financial advisors

Common Situations

An Albuquerque, NM investor is comparing a TIC offering against a DST offering for a portion of 1031 exchange proceeds.

An investor in Albuquerque, NM was offered an LLC membership interest marketed as fractional real estate and wants to confirm whether it qualifies for an exchange.

A property owner in Albuquerque, NM wants to split exchange proceeds across several fractional interests to diversify across property types.

FAQs about Fractional Real Estate Investing

What is the difference between a TIC and a DST?

A TIC gives each investor a direct, undivided deed interest in the property, while a DST gives investors a beneficial interest in a trust that holds legal title. Both can qualify as 1031 exchange replacement property when properly structured. We help Albuquerque, NM investors compare the practical differences.

Are all fractional real estate investments eligible for a 1031 exchange?

No. Only structures that preserve a direct real property interest, such as TICs and properly structured DSTs, generally qualify. LLC membership interests and syndication units are typically treated as partnership interests, which are excluded under Section 1031(a)(2). We help Albuquerque, NM investors confirm the legal structure of any fractional offering.

What are the seven deadly sins that apply to DSTs?

This is an informal term for a set of operating restrictions on Delaware Statutory Trusts, including limits on renegotiating existing leases, making major capital improvements, and reinvesting sale proceeds, all designed to preserve the trust's passive, fixed structure for tax purposes. We help Albuquerque, NM investors understand these restrictions before investing.

How much control do I have as a TIC or DST investor?

TIC investors typically have more direct decision making rights as co-owners, subject to agreements among the co-tenants, while DST investors have essentially no operating control, since the trust structure is intentionally passive. We help Albuquerque, NM investors match this control tradeoff to their preferences.

Is fractional ownership riskier than owning a whole property?

Fractional ownership carries its own risks, including reliance on a sponsor or co-owners, illiquidity, and the specific terms of the offering, which are different from the risks of sole ownership. We recommend reviewing any specific offering with a licensed provider before investing.

Can I combine multiple fractional interests to satisfy a 1031 exchange?

Yes, an investor can acquire more than one TIC or DST interest as part of identifying and closing replacement property, subject to the same forty five day identification and one hundred eighty day closing deadlines as any other exchange. We help Albuquerque, NM investors coordinate multiple fractional acquisitions.

Compliance and Limits

Educational content only. Not tax, legal, or investment advice. Tenancy in Common guidelines are described in Internal Revenue Service Revenue Procedure 2002-22, and Delaware Statutory Trust treatment as direct real property interest is addressed in Revenue Ruling 2004-86. Partnership interests are excluded from like-kind treatment under Internal Revenue Code Section 1031(a)(2). DST and TIC interests may be securities. We do not sell securities. We provide introductions to licensed providers only. Consult with a Qualified Intermediary, a licensed provider, and a qualified tax advisor before investing.