Can I identify a whole building and buy only a partial interest, such as 50%, in it?

The regulations approve a 75% piece, and say nothing kinder about less

Paragraph (d)(1) of Reg. section 1.1031(k)-1 treats identified property as received only if "the replacement property received is substantially the same property as identified." The examples show where the line sits.

In Example 4, a taxpayer identifies two acres of unimproved land worth $250,000 and buys 1.5 acres for $187,500. Because the part bought does not differ in basic nature or character and is worth 75% of the whole, it is substantially the same property. In Example 3, buying only the barn and its land out of an identified farm parcel fails, because that part differs in character from the whole.

Neither example involves a fractional ownership interest, and the regulation does not say that any share below 75% passes. A 50% interest gives you half the value, which is outside the only approved benchmark.

Identify the interest you are actually buying

The description rule in paragraph (c)(3) requires an unambiguous description, and for real property accepts a legal description, street address or distinguishable name. Nothing prevents you from describing a fractional interest, such as "an undivided 50% tenant-in-common interest in 400 Harbor Road."

Wording it that way matches the identification to the receipt, so the substantially-the-same question never arises. It also helps under the 200% rule, because that rule adds up the fair market value of what you identify; naming the whole building counts the whole building's value against your limit.

If the share is not settled, you may name more than one version, such as the 50% interest and the 60% interest, but each counts as a separate property under the three-property rule. See how many replacement properties you can identify.

• Name the building by street address or legal description, not by a nickname your co-buyer uses.
• State the percentage and the form of ownership, such as tenant in common.
• Sign the notice and send it to your intermediary or another permitted party before midnight on day 45.
• Keep the co-ownership agreement draft with the notice so the intended interest is documented.

Worked example: half a $2 million building for a $1 million sale

Hypothetical, round numbers; run your own numbers with your CPA. You sell a rental for $1,000,000 with no debt, and you and a friend plan to buy a $2,000,000 building together, each taking a 50% interest.

If your notice names only "400 Harbor Road," you receive half of its value, $1,000,000 of a $2,000,000 property. That is 50%, against the 75% the regulation's example accepted, and an auditor could argue you did not receive substantially the same property as identified, which would make the whole $1,000,000 taxable.

If your notice names "an undivided 50% tenant-in-common interest in 400 Harbor Road," you received exactly what you identified, and the 200% rule counts $1,000,000 of value rather than $2,000,000.

Own the share directly, not through a shared entity

Reg. section 1.1031(a)-3(a)(5) lists "interests in a partnership" among the intangible assets that are not real property for section 1031. If you and your co-buyer take title through a jointly owned LLC taxed as a partnership, you receive a partnership interest, which is not like-kind real estate.

Holding the building as tenants in common is the usual alternative, and the IRS's ruling guidelines in Rev. Proc. 2002-22 describe what keeps co-ownership from being treated as a partnership, including a limit of 35 co-owners and unanimous approval of any sale, lease, renegotiation of debt secured by a blanket lien, or hiring of a manager. The procedure itself says its guidelines are conditions for considering a ruling request and are not to be used for audit purposes, so have your attorney review the co-ownership agreement.

For buying alongside a partner more broadly, see buying a replacement with a partner.

Fractional interests built for exchanges already solve the wording problem

A Delaware Statutory Trust interest is identified as a beneficial interest in a named trust, so the notice describes exactly what you will receive. The IRS ruled in Rev. Rul. 2004-86 that such an interest is treated as an interest in the trust's real estate rather than a trust certificate.

How to word that kind of entry is the subject of how to identify a DST interest on your 45-day list, and the trade-offs against co-owning directly are in DST versus TIC structure.