Can I 1031 into a syndication, real estate fund or LLC interest?

The partnership exclusion left the statute in 2017 and now lives in the regulation

Before the Tax Cuts and Jobs Act, section 1031(a)(2)(D) listed "interests in a partnership" among the things an exchange could not touch. Public Law 115-97 rewrote that paragraph, which now reads only: "This subsection shall not apply to any exchange of real property held primarily for sale."

The exclusion did not vanish; it moved. Treas. Reg. §1.1031(a)-3(a)(5)(i) lists the intangible assets that are not real property "regardless of the classification of such property under State or local law", and item (C) on that list is "Interests in a partnership".

Item (D) is "Certificates of trust or beneficial interests", and item (B) is "Other securities or evidences of indebtedness or interest". An offering document that still cites the repealed statute was written from an old template; read the regulation instead.

An LLC unit is a partnership interest wearing a different label

Treas. Reg. §301.7701-3(b)(1) classifies a domestic eligible entity with two or more members as a partnership unless it elects corporate treatment. Buying units in a sponsor's multi-member LLC is buying a partnership interest, and the exclusion bites.

The same paragraph disregards a single-member LLC, so its owner is treated as holding the underlying real property. That is why taking title through your own new single-member LLC works while subscribing to a sponsor's LLC does not; can an LLC do a 1031 exchange covers the entity side of your own title.

The marketing word does not decide it. "Fund", "program", "co-investment" and "private REIT" nearly always describe partnership or corporate interests, and REIT shares are stock on the same exclusion list.

What a DST does differently, in the ruling's own words

Rev. Rul. 2004-86 holds that a conforming Delaware Statutory Trust is an investment trust under §301.7701-4(c), and that its owners are grantors of it under section 677, so each is "considered to own an undivided fractional interest in Blackacre for federal income tax purposes."

The ruling then draws the line this page turns on. The transaction "is the exchange of real property for an interest in Blackacre, and not the exchange of real property for a certificate of trust or beneficial interest". That sentence is what keeps a DST off item (D) of the regulation's exclusion list.

It holds only while the trustee stays powerless. Give the trustee power to sell and reinvest, renegotiate the lease or the loan, invest cash to profit from market movements, or make more than minor non-structural changes, and the ruling says the trust becomes a business entity classified as a partnership. The seven deadly sins of a DST lists them one by one.

Tenancy in common qualifies because co-ownership is on the regulation's short "yes" list

The same paragraph that excludes partnership interests names "co-ownership" among the intangible assets that are real property for section 1031. An undivided deeded percentage is replacement property in its own right.

Rev. Proc. 2002-22 sets out what the IRS wants to see before it will rule on one: no more than 35 persons, counting spouses as one person and all heirs of a co-owner as one person, plus unanimous approval for any sale, any lease, the hiring of a manager and the negotiation of blanket-lien debt.

Section 6.03 is the condition that catches sponsors. The co-ownership "may not file a partnership or corporate tax return, conduct business under a common name, execute an agreement identifying any or all of the co-owners as partners, shareholders, or members of a business entity". DST vs TIC compares the two structures for an exchanger.

A five-minute screen you can run on any offering before day 45

You do not need the tax opinion to form a first view. Five questions separate a qualifying structure from a partnership almost every time.

If any answer points to a partnership return, stop there and ask the sponsor whether a separate exchange vehicle exists alongside the main offering.

• Which tax document will I receive: a Schedule K-1 from a Form 1065, or a grantor-trust statement showing my share of rents, expenses and depreciation? A K-1 from a partnership return answers the whole question.
• Who is named on the deed: the trust, or my own co-tenancy percentage, or an entity whose units I am buying?
• Does the tax opinion address section 1031 by name, and does it rest on Rev. Rul. 2004-86 or Rev. Proc. 2002-22?
• Can the manager sell, refinance or re-let without me? For a tenancy in common, unanimity is a Rev. Proc. 2002-22 condition; for a DST, that power would break the trust classification.
• Is there a springing LLC in the documents, and what triggers it? What a springing LLC means for your next exchange.

The section 761(a) election is the one partnership route, and syndications cannot meet it

Section 1031(e) treats an interest in a partnership with a valid election under section 761(a) as "an interest in each of the assets of such partnership and not as an interest in a partnership". That is the only door the Code leaves open on the partnership side.

Treas. Reg. §1.761-2 restricts the election to an organization "availed of for investment purposes only and not for the active conduct of a business", whose participants own the property as co-owners and reserve the right separately to take or dispose of their shares. A leveraged program with a manager who signs leases fails on the first clause, and the election itself has to be filed with a Form 1065 statement by that return's due date.

Rev. Rul. 2004-86 closes the door from the other side too: if a trust slips into partnership status, "because the assets of DST will not be owned by the beneficiaries as coowners under state law, DST will not be able to elect to be excluded from the application of subchapter K."

Getting out of a syndication you already own is the mirror of the same rule

When the partnership sells the building, the partnership is the taxpayer, so only the partnership can exchange. Your K-1 reports a share of taxable gain whatever you would have preferred.

The planning happens before the sale rather than after it, through a distribution of undivided interests or an agreed split among the partners. 1031 exit options for limited partners and drop-and-swap set out what each route costs and when it has to be done.

Confirm all of this with your own CPA or attorney before you sign a subscription agreement, because the structure is fixed by documents you cannot amend afterwards.