Fractional interest in a 1031 exchange refers to ownership in a property that is divided among multiple owners, where each owner holds a distinct percentage of ownership in the property. Fractional interests in real estate can be exchanged in a 1031 exchange if they are considered like-kind property.
Key-Takeaway
- Fractional interests in real estate can be eligible for a 1031 exchange if they qualify as like-kind property.
- The percentage of ownership in the fractional interest must be clearly defined and the property must meet the requirements of a 1031 exchange.
Example
A taxpayer wants to sell their rental property and use a 1031 exchange to defer capital gains tax. Instead of buying a single property, they choose to buy into a fractional ownership program where they own a specific percentage of multiple properties. In this case, the taxpayer can complete a 1031 exchange as long as the fractional interests in the properties qualify as like-kind property.
Tips
- Carefully review the terms and conditions of fractional interests before investing to ensure they qualify as like-kind property.
- Consider alternative investment options if fractional interests do not qualify as like-kind property.
Recommendations
- Consult with a tax professional and real estate attorney to ensure compliance with 1031 exchange regulations.
- Carefully review the terms and conditions of the fractional interests and the properties they represent before proceeding with a 1031 exchange.