Fractional real estate investing lets a buyer own a slice of a property, an apartment building, a warehouse, a portfolio of net-lease retail sites, rather than the whole thing. The appeal is straightforward: access to assets that would otherwise require far more capital or expertise than a single buyer has, spread across a smaller check size. What isn't straightforward is that fractional ownership comes in several legal forms, and they aren't interchangeable, particularly for a Rhode Island owner weighing whether the interest can be used to defer capital gains tax on a sale.
Confusing one fractional structure for another is a common and expensive mistake, since eligibility for a 1031 exchange, liquidity, and control all differ sharply depending on which form the ownership actually takes.
Tenancy in Common: Direct Fractional Title
A tenancy-in-common, or TIC, structure gives each investor a direct, undivided percentage interest in the property's title itself, recorded as such. Because it's direct real property ownership, not an interest in an entity, a TIC interest can qualify as like-kind replacement property in a 1031 exchange. TIC investors typically have some voting rights on major property decisions, though in practice a sponsor or manager usually handles day-to-day operations.
TIC structures were more common before Delaware statutory trusts became the standard vehicle for passive, exchange-eligible fractional ownership, largely because unanimous consent requirements among TIC owners for major decisions can create friction that a DST's single-trustee structure avoids.
Delaware Statutory Trusts: The Modern Standard
A DST holds title to the property in trust, with investors owning a beneficial interest in the trust rather than the property directly, but structured so that interest is treated as direct real property ownership for tax purposes. This is what allows a DST interest to qualify for a 1031 exchange while removing the unanimous-consent problem of a TIC, since a trustee, not the individual investors, makes operating decisions.
DST investors have no vote and no control over property decisions. In exchange, they get a passive, professionally managed interest that can close relatively quickly against a tight exchange deadline, provided the sponsor has current capacity in the offering.
Crowdfunded and Entity-Based Fractional Ownership
Online real estate platforms often offer fractional interests structured through an LLC or a fund, where the investor owns shares of the entity rather than a direct interest in the underlying real property. This structure is common because it's operationally simpler for the platform to administer across many small investors, but it means the interest generally does not qualify for a 1031 exchange, since the investor's legal relationship is to the entity, not the real estate.
An investor evaluating a crowdfunded fractional opportunity should ask directly whether the offering is structured as a TIC or DST, versus an LLC membership interest, before assuming exchange eligibility either way.
Matching the Structure to the Goal
An investor deploying new, non-exchange capital has more flexibility, since entity-based fractional structures are often simpler and can carry lower minimums. A Rhode Island owner selling an appreciated property and needing a qualifying replacement has a narrower field: TIC or DST, sourced and vetted before the 45-day identification deadline closes, with the trust structure verified in the offering documents rather than assumed from marketing materials.
Common 1031 Exchange Questions
What's the difference between a TIC and a DST?
A tenancy-in-common gives investors direct title with some voting rights on major decisions, while a DST holds title in trust with a trustee making decisions and no investor vote. Both can qualify for a 1031 exchange when properly structured.
Does every fractional real estate investment qualify for a 1031 exchange?
No. Many crowdfunded platforms structure fractional interests through an LLC or fund, which generally does not qualify, since the investor owns entity shares rather than a direct interest in real property.
Why did DSTs become more common than TIC structures for exchanges?
TIC ownership requires unanimous consent among investors for major property decisions, which can create operational friction. A DST's trustee structure avoids that requirement, making it easier to manage and market to a larger investor base.
Can you sell your fractional interest before the property sale?
Generally no. TIC and DST interests are illiquid and typically cannot be sold on an open market before the sponsor's planned disposition of the underlying property.
How do you confirm whether an offering qualifies for a 1031 exchange before committing?
Review the offering documents for the legal structure, TIC or DST versus an LLC membership interest, and confirm with a qualified intermediary before relying on the interest as replacement property.
