Can You 1031 Exchange Into a Syndication?

In this episode, Nathan and Matt unpack one of the most misunderstood areas of real estate taxation: how 1031 exchanges interact with partnerships and syndications, and where TIC (tenants-in-common) ownership fits into the equation.

Many investors ask the same question:
“Can I 1031 exchange into a real estate syndication?”

The short answer? No.
The long answer? Yes… kind of.

What Is a 1031 Exchange?

A 1031 exchange allows real estate investors to defer capital gains taxes when they sell one property and reinvest the proceeds into another like-kind property.

As Matt explains, “Like-kind means real estate for real estate. It doesn’t matter if it’s land, multifamily, or commercial. If it’s real estate, it qualifies.”

But here’s the catch:

When you invest in a syndication, you’re not buying property directly. You’re buying an ownership interest in an LLC that owns the property. That ownership interest isn’t considered “like-kind” real estate. It’s a partnership interest, which the IRS doesn’t allow in a 1031 exchange.

Enter the TIC Structure

A tenancy-in-common (TIC) offers a potential workaround. With a TIC, multiple investors share ownership of the same property. They’re literally on the deed together.

For example, in a $10 million property, an investor with $1 million in 1031 proceeds could purchase a 10% TIC interest, holding legal title to that share of the property.

Nathan explains:

“When you’re a TIC owner, you own part of the property itself. When you’re in a partnership, you own part of an LLC. That distinction makes all the difference.”

However, the IRS scrutinizes TIC arrangements closely. As Matt points out, “If it walks like a duck and quacks like a duck, it’s a partnership.”

If a TIC starts to look or behave like a partnership,  such as having preferred returns, structured distributions, or shared management, the IRS can reclassify it as a partnership, invalidating the 1031 exchange and triggering capital gains tax.

The Rules of the Game: IRS Revenue Procedure 2002-22

The IRS has published specific guidance under Revenue Procedure 2002-22, outlining how a TIC must operate to maintain its status.

Investors and syndicators must follow all of these requirements, not “most” or “some.”

If the IRS determines the structure violates these rules, they can retroactively declare the TIC to be a partnership. That means years of missed partnership returns, unfiled K-1s, and potential penalties and fines.

Why It’s Not Always Worth It

Forming a TIC can be a complex and expensive process.

Syndicators often set minimum investment thresholds, sometimes $500,000 or even $1 million, to justify the additional legal and accounting work.

Even then, treating TIC investors correctly requires careful handling. They can’t have preferred returns or partnership-style benefits. They simply receive their share of the property’s income and expenses, nothing more, nothing less.

If they’re treated like partners, the IRS can undo the exchange retroactively.

Understanding Drop-and-Swap Strategies

Another concept Nathan and Matt discuss is the “drop and swap” strategy, a way for partners in an LLC to eventually separate and perform their own 1031 exchanges.

Here’s how it works:

Before the sale, the LLC distributes ownership of the property to its members, converting it from LLC ownership into a TIC structure. Each member then owns their fractional interest directly and can 1031 their share into a new property.

While this sounds straightforward, Matt cautions:

“It’s very complicated, and there’s a lot of gray area in how the IRS and different state agencies view it. You definitely need both a CPA and a tax attorney involved before you try it.”

When a TIC Might Make Sense

TIC arrangements can make sense in limited situations, for example:

• When a syndicator has a key investor with 1031 funds that are essential to close a deal
• When multiple funds want to 1031 into a larger property together
• When a deal sponsor’s business model involves rolling properties forward rather than selling

But Nathan and Matt agree: this strategy only works when the benefit outweighs the complexity.

Final Thoughts

1031 exchanges are already intricate. Layering them with syndications, partnerships, and TIC ownership adds another level of complexity that requires careful planning and expert guidance.

Nathan and Matt emphasize that understanding the legal and tax distinctions isn’t optional. It’s essential for any operator or investor trying to protect gains, structure deals correctly, and avoid costly IRS reclassifications.

“If you’re considering a 1031 exchange into a syndication or TIC,” Nathan concludes,

“Make sure you have a solid bench, a qualified CPA, and a good real estate attorney before you move forward.”

Need help building your bench?
Schedule a discovery call with our firm.