IMPORTANT DISCLOSURE: This guide provides educational information only and does not constitute legal, tax, or investment advice. Tax laws vary by jurisdiction and individual circumstances. Always consult with qualified tax and legal professionals before making investment decisions. Past performance does not guarantee future results.
Fractional real estate ownership through tokenization is a securities-based investment structure where physical real estate assets are divided into digital security tokens representing proportional ownership interests. This structure allows investors to own shares of properties with lower minimum investment requirements compared to purchasing entire properties.
Fractional real estate ownership operates through three primary legal structures, each with distinct tax implications:
The most common structure for tokenized real estate, where each property is held in a separate legal entity (typically a Delaware LLC or Series LLC). Investors receive security tokens representing membership interests in the SPV.
Tax Classification:
Some tokenized platforms operate as REITs, offering tokens that represent REIT shares rather than direct property ownership.
Tax Classification:
Less common structure where tokens represent debt obligations secured by real estate rather than equity ownership.
Tax Classification:
The Internal Revenue Service treats tokenized real estate investments based on the underlying structure rather than the technology used. Understanding proper classification is essential for accurate tax reporting.
Security tokens representing real estate ownership are not treated as cryptocurrency for tax purposes. Instead, they are classified as securities under IRC Section 1234A, with specific treatment depending on the underlying structure.
Rental income from tokenized real estate investments is generally treated as passive income under IRC Section 469, with specific tax treatment varying by structure.
Tax Treatment Overview:
INCOME TAX RATE COMPARISON*
| Income Type | Tax Rate | Additional Notes |
| SPV Rental Income | 10-37% (ordinary) | + 3.8% NIIT if MAGI > $200K/$250K |
| REIT Distributions | 10-37% (ordinary) | Potential 20% QBI deduction |
| Capital Gains (< 1 year) | 10-37% (short-term) | Treated as ordinary income |
| Capital Gains (> 1 year) | 0%, 15%, or 20% | Preferential long-term rates |
*For demonstration and educational purposes, this chart may not be kept up to date so please do your due diligence and research by speaking with your accountant or government tax representative
Under IRC Section 199A, certain pass-through income may qualify for a 20% deduction, reducing effective tax rates.
Qualification Requirements:
Accurate cost basis calculation is critical for properly reporting capital gains or losses when selling fractional or tokenized real estate investments.
The initial cost basis includes all costs directly related to acquiring the investment:
For SPV/LLC structures, cost basis is adjusted annually based on pass-through items reported on Schedule K-1:
Increases to Basis:
Decreases to Basis:
Depreciation is one of the tax benefits of real estate investing, allowing investors to deduct the cost of property improvements over time even while the property may be appreciating in market value.
The IRS requires straight-line depreciation for residential and commercial real estate:
IRC Section 469 limits the deductibility of passive losses, including depreciation from rental real estate:
