1031 EXCHANGES · DSTs · TICs · MULTIFAMILY
A Section 1031 exchange can allow qualifying investors to defer recognition of gain when exchanging business or investment real property for qualifying like-kind real property. DST and TIC structures can provide different ways to hold replacement real estate, including multifamily assets, when the structure and transaction satisfy applicable requirements.
Educational overview only. Capital Advisors is not a qualified intermediary, tax adviser, or legal adviser. Your tax and legal advisers should confirm your exchange structure before you act.
THE CORE IDEA
The IRS states that a like-kind exchange may defer recognition of gain when qualifying business or investment real property is exchanged for other qualifying business or investment real property. The replacement property can differ in grade or quality; U.S. real property is generally not like-kind to foreign real property. A failed timeline or receipt of cash or other non-like-kind property can create current taxable gain.
An investor identifies and acquires a qualifying replacement property directly, subject to the exchange rules and documentation.
Under IRS Revenue Ruling 2004-86, a qualifying DST described in that ruling can be treated so that an owner is considered to own an undivided fractional interest in the trust’s rental real property for federal tax purposes.
A TIC structure gives co-owners undivided fractional interests in real property. IRS Rev. Proc. 2002-22 describes conditions the Service considers when evaluating whether a co-ownership is not a business entity for federal tax purposes.
DST vs. TIC IN MULTIFAMILY
A qualifying DST can hold an apartment property while investors own beneficial interests. The structure is generally sponsor-led, with limited investor decision-making. For a 1031 investor, counsel must confirm that the specific DST and transaction fit the requirements of Section 1031 and Revenue Ruling 2004-86.
TIC investors own undivided fractional interests in the underlying real estate. Rev. Proc. 2002-22 addresses factors including co-owner voting, sharing of profits and debt, management agreements, leasing, transfer restrictions and the scope of business activities.
HOW CAPITAL ADVISORS CAN USE THESE STRUCTURES
For qualifying projects, Capital Advisors can work with investors and their independent advisers to evaluate whether direct real-property ownership, a DST structure, or a TIC structure is appropriate. The exchange itself should be administered by an independent qualified intermediary and reviewed by the investor’s tax and legal advisers.
CAPITAL ADVISORS' ROLE
Our role can include sourcing and underwriting multifamily acquisitions, coordinating project-level financing and diligence, working with tax/securities counsel on an appropriate ownership vehicle, and managing the real estate after closing.
WHY MULTIFAMILY
DST and TIC structures can make fractional ownership of larger multifamily properties possible. That can reduce the need for one investor to source, finance and operate a whole property—but it also introduces sponsor, governance, leverage, valuation, liquidity and execution risks that should be reviewed before investing.
Missing identification or closing deadlines can cause the exchange to fail.
Occupancy, rent growth, expenses, capital needs and local supply can affect performance.
Debt can amplify losses and refinancing risk as well as returns.
DST and TIC interests may be difficult to sell and can have material transfer or governance limits.
COMMON QUESTIONS
No. A qualifying exchange generally defers recognition of gain rather than permanently eliminating it. Basis generally carries into the replacement property, subject to the applicable rules.
Potentially, if the relinquished and replacement assets satisfy the Section 1031 requirements and the investor follows the timing, identification, ownership and other applicable rules. Rental real property is an example of property that may qualify.
Revenue Ruling 2004-86 holds that an interest in the specific type of DST described in the ruling can be treated as an interest in the underlying real property for Section 1031 purposes if the other requirements are satisfied. Not every trust or DST structure automatically qualifies.
An undivided fractional interest in real property can potentially be qualifying real property. Rev. Proc. 2002-22 describes factors the IRS considers when evaluating whether a TIC co-ownership is not treated as a business entity. Transaction-specific advice is essential.
No. Investors should use an independent qualified intermediary and their own tax and legal advisers. Capital Advisors' role is focused on the real-estate opportunity and, where applicable, the sponsor/asset-management function.
Receiving money or other non-like-kind property can cause gain to be recognized to the extent required by the tax rules. Your tax adviser should model the specific transaction before closing.
1031 MULTIFAMILY DISCOVERY CALL
If you are evaluating a 1031 exchange and want to understand how multifamily, DST, or TIC structures could fit into your replacement-property search, start with a conversation before making an investment decision.