Can You Do a 1031 Exchange with Crowdfunding Investments?

Usually not. A 1031 exchange defers tax only when you trade real property for real property, and IRS rules say partnership interests, stock, other securities, and beneficial interests in a trust are not real property, so an LLC membership interest, a limited partnership unit, REIT shares, or fund shares bought on a crowdfunding platform cannot be part of an exchange. Two structures are the exception: a Delaware statutory trust (DST) set up like the one the IRS approved in Rev. Rul. 2004-86, and a tenancy-in-common (TIC) interest that puts part of the deed in your name. Both are sold as private placements, securities offerings exempt from SEC registration, and recent DST offerings set minimums of $25,000 to $250,000 and estimated upfront selling costs of about 6% to 8% of the money raised.

Why most crowdfunding investments can't be exchanged

A 1031 exchange lets you defer gain on real property held for business or investment only if you receive like-kind real property in return. In a deferred exchange, where you sell first and buy later, you must identify the replacement within 45 days after you transfer the property you sell and receive it within 180 days or by your tax return's due date with extensions, whichever comes first. A qualified intermediary, an independent party that holds the sale proceeds between the two closings, makes the transaction count as an exchange; your agents and related parties cannot serve in that role. Sign the written exchange agreement before the sale closes: if you receive the cash, or can get at it, before you receive the replacement property, the IRS treats the deal as a taxable sale. The Instructions for Form 8824 list property that is not real property for this purpose regardless of how state law classifies it: stock, bonds, notes, other securities, interests in a partnership, and certificates of trust or beneficial interests.

The rule works in both directions. You cannot sell a rental and roll the gain into a crowdfunding LLC, and when a crowdfunding LLC sells its building, you cannot take your share of the gain and exchange it on your own. Only the LLC could exchange the building, and the sponsor, as manager, generally makes that call under the operating agreement. Tax implications of real estate crowdfunding explains how that gain reaches your return.

How a Delaware statutory trust qualifies

A DST interest is a beneficial interest in a trust, which on its own would not qualify. In Rev. Rul. 2004-86, however, the IRS ruled that investors in a DST set up a certain way are treated as owning an undivided fractional interest in the trust's real estate itself, so exchanging real property for a DST interest can qualify if the other 1031 requirements are met. The trust in the ruling qualified because its trustee had almost no power to change the investment. Under the trust agreement, the trustee:

• Could not accept more money from investors or buy other property.
• Could not renegotiate the mortgage or the lease, or lease to a new tenant unless the existing tenant went bankrupt or became insolvent.
• Could make only minor non-structural changes to the building unless the law required more.
• Had to hold cash between distributions only in short-term debt and distribute available cash every quarter.

The trust also ends when it sells the property, so the sale proceeds cannot be reinvested inside it. For you, this means a DST cannot raise new money if the building needs a major repair or the loan comes due. Some sponsors work around the limits with a master lease: in the DST program described in the 2025 annual report of Ares Real Estate Income Trust, each property is leased to a sponsor affiliate under a long-term master lease guaranteed by the sponsor's operating partnership.

To defer all of your gain, reinvest all of your net sale proceeds and replace the mortgage you pay off with new debt or added cash. Cash you keep and any paid-off debt you do not replace are taxable, up to the amount of your gain. A DST's loan is secured by the property you are treated as owning, so your share of it counts toward replacing debt.

How a tenancy-in-common interest qualifies

With a TIC interest, you hold title to an undivided share of the property, directly or through an entity the IRS disregards such as a single-member LLC, so you own real property. The risk is that a co-ownership run like a business is treated as a partnership, which would make your interest a partnership interest. Rev. Proc. 2002-22 lists the conditions under which the IRS will consider a request for a private ruling that a co-ownership is not a partnership. They include:

• No more than 35 co-owners, with a married couple counted as one.
• Unanimous approval of any sale, lease, or refinancing of a loan secured by the whole property, and of hiring a manager.
• Each co-owner shares revenue and costs in proportion to its share, and management agreements renew at least once a year.

The IRS says these are guidelines for requesting a ruling, so following them is not a guarantee. The unanimity rule also means a single co-owner can block a sale or a refinancing.

What DSTs and TICs cost and require

• Investor status. These interests are sold in private placements, and many of the offering exemptions under federal securities laws limit buyers to accredited investors. For an individual, that generally means income over $200,000 ($300,000 with a spouse or partner) in each of the past 2 years with the same expected this year, or net worth over $1 million not counting your home. Blue Owl Real Estate Exchange V DST, for example, reported 22 investors and no non-accredited investors on its 2026 Form D.
• Minimums. Moody Med Center 2 DST listed a $25,000 minimum and Blue Owl Real Estate Exchange V DST a $250,000 minimum in 2026 Form D filings.
• Upfront costs. Blue Owl's Form D estimates an upfront sales load of up to $16.2 million on a $269.5 million offering, about 6%. Moody's estimates $3.35 million of sales commissions on $41.9 million, 8%. In Ares's DST program, the broker-dealer receives commissions of up to 5% and a dealer manager fee of up to 1.5% of the money raised, investors pay a further fee of up to 1.5%, and the sponsor says these costs are substantially funded by the investors. At 6%, about $30,000 of a $500,000 purchase pays selling costs instead of buying property.
• Control and timing. In a DST, you do not decide when the property sells. The trust ends when its property is sold, and you need a new exchange at that point to keep deferring. In a TIC, a sale of the whole property needs every co-owner's approval, though each co-owner keeps the right to sell its own share or ask a court to divide or sell the property under state partition law.
• Buyout into REIT units. Ares's operating partnership, the entity that owns the REIT's properties, holds an option to buy DST investors out for units in that partnership, cash, or a mix. Those units are partnership interests, so you cannot use them in a later 1031 exchange.

Other ways to defer or reduce the tax

• Qualified Opportunity Fund. You can invest an amount up to your capital gain, including gain from selling a crowdfunding interest or a rental, in a Qualified Opportunity Fund within 180 days. For money invested on or after January 1, 2027, the deferred gain is taxed 5 years later or when you sell, whichever comes first; if you hold the fund interest 5 years, 10% of the gain is never taxed (30% in a qualified rural fund), and growth on the fund interest is tax-free if you hold it at least 10 years. Gain deferred with money invested by December 31, 2026 is taxed on your 2026 return. Opportunity Zones for real estate investors covers the fund rules.
• An exchange by the deal itself. Before you invest in a crowdfunding LLC, ask whether the operating agreement allows the LLC to exchange into another property instead of selling for cash. If the sponsor exchanges, the gain stays deferred for every member, and you stay invested.
• Owning rentals directly. If being able to exchange from one property into the next matters to you, direct ownership compared with crowdfunding covers the work and control that come with it.

For how crowdfunding platforms, sponsors, and deal structures work, see what real estate crowdfunding is.