The legal structure for fractional real estate investment generally falls into two categories: Entity-based ownership (where you own shares in a company that owns the land) or Direct ownership (where your name is actually on the deed alongside others).
Modern investment platforms almost exclusively use entity-based structures because they are easier to manage and scale.
1. Special Purpose Vehicles (SPV) / LLCs
The most common structure for modern crowdfunding and fractional platforms is the use of a Special Purpose Vehicle (SPV), typically organized as a Limited Liability Company (LLC) (Schwarcz & Bourret, 2023).
- Structure: The platform creates a unique LLC for a specific property. The LLC holds the title to the real estate.
- Ownership: Investors do not own the real estate directly; instead, they own equity shares in the LLC (Schwarcz & Bourret, 2023).
- Liability: As the name suggests, liability is limited. If someone slips and falls on the property, they sue the LLC, not the individual fractional investors.
- Taxation: These are often "pass-through" entities, meaning the LLC itself doesn't pay income tax; instead, the profits or losses "pass through" to the individual investors' tax returns.
2. Tenancy-in-Common (TIC)
A Tenancy-in-Common is a more traditional legal structure where multiple people hold an undivided fractional interest in the actual title of the property (Lowies et al., 2018).
- Structure: Each investor’s name (or their personal LLC) is recorded on the property deed. Each tenant has a non-exclusive right to possess the entire property (Lowies et al., 2018).
- Usage: TICs are frequently used in commercial real estate and for Section 1031 exchanges, which allow investors to defer capital gains taxes by "swapping" one investment property for another.
- Complexity: Because every owner is on the deed, major decisions (like selling the building) often require unanimous consent, which can lead to legal gridlock.
3. Real Estate Investment Trusts (REITs)
While often thought of as a stock, a REIT is a formal corporate structure (a trust or corporation) that owns, operates, or finances income-producing real estate (Lowies et al., 2018).
- Fractional Nature: Investors buy shares in the trust. Unlike an LLC focused on one building, a REIT usually owns a massive portfolio of properties.
- Legal Requirement: To qualify as a REIT and avoid corporate-level taxation, the entity must distribute at least 90% of its taxable income to shareholders annually.
Summary Comparison
| Feature | LLC / SPV (Modern) | Tenancy-in-Common (TIC) |
|---|---|---|
| Legal Title | Held by the Company | Held by each individual |
| Asset Type | Personal Property (Shares) | Real Property (Deed) |
| Management | Centralized (Manager-led) | Devolved (Requires co-owner agreement) |
| Ease of Sale | High (Sell shares on platform) | Low (Requires deed transfer/legal filings) |
References
Lowies, B., Whait, R. B., Viljoen, C., & McGreal, S. (2018). Fractional ownership – an alternative residential property investment vehicle. Journal of Property Investment & Finance, 36(6), 513–522. https://doi.org/10.1108/jpif-02-2018-0013
Cited by: 20
Schwarcz, S. L., & Bourret, R. (2023). Fractionalizing Investment Securities: Using FinTech to Expand Financial Inclusion. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4391083
Cited by: 19
Are you asking because you're interested in the tax implications of these structures, or are you looking at the liability side of things?