Guides

How to Invest in Real Estate

Investors in San Diego, CA generally have several distinct paths into real estate, and understanding the differences matters most for anyone who may eventually want to use a Section 1031 exchange, since not every ownership structure qualifies as real property for exchange purposes. Direct ownership, meaning buying a single family rental, small multifamily building, or commercial property outright in the investor's own name or a single member entity, generally offers the most control and generally qualifies straightforwardly as like-kind real property eligible for a 1031 exchange when the property is held for investment or business use. Publicly traded real estate investment trusts, or REITs, generally offer a liquid, diversified way to own real estate exposure through shares traded like stock, but a REIT share is generally treated as a security interest in an entity rather than a direct interest in real property, so REIT shares generally do not qualify for 1031 exchange treatment. A Delaware Statutory Trust, or DST, and a tenant in common, or TIC, structure generally sit closer to direct ownership for tax purposes. When structured to meet Internal Revenue Service guidance, primarily Revenue Ruling 2004-86 for DSTs, an investor's interest in these vehicles is generally treated as a direct fractional interest in real property, which generally allows it to qualify as like-kind replacement property in a 1031 exchange, while still offering passive, professionally managed ownership; because a DST or TIC interest may be a security, we do not sell securities and only provide introductions to licensed providers. Real estate syndications and crowdfunding platforms generally work differently. In a typical syndication, a sponsor pools investor capital into a single purpose LLC or limited partnership that then buys the property, and investors generally receive a membership or partnership interest in that entity rather than a direct interest in the real estate itself. Because Section 1031 generally excludes partnership interests from qualifying as like-kind property, syndication and most crowdfunding equity interests generally do not qualify for a 1031 exchange, even though the underlying asset is real estate. This distinction surprises some San Diego, CA investors who assume any real estate related investment should exchange freely, when in fact the legal form of the investor's interest, not just the underlying property, generally determines 1031 eligibility. For investors approaching a sale who want to defer tax and stay in real estate, we generally focus on direct ownership and DST or TIC replacement property options, since these are the structures most consistently recognized as qualifying like-kind property. Educational content only. This is not tax, legal, or investment advice, and prospective investors should confirm the tax treatment of any specific structure with a qualified advisor before investing.