I am in the process of selling a 3 unit residential investment property and would like to do a 1031 exchange on the proceeds to defer capital gains tax. Here is what I would like to do and i'm wondering if someone can provide their educated opinion on if this is correct from a tax perspective-
I'd like to start an investment fund with the goal of raising $1M in capital to invest in mobile home parks. I'd like to roll the $100k gain on the property i'm selling into this fund in exchange for a 10% ownership interest interest in the fund. I will then pursue additional fund raising to raise the remaining capital, and use the fund to buy a mobile home park. The fund will identify a new park to purchase within 45 days of selling my property and will close on the park within the required time limit.
You can't do that, a 1031 can not be rolled into an ownership share of a fund, that is not a like kind exchange. You can 1031 the money and become tenants in common with a fund. In other words, you raise the fund and upon closing, the fund and your 1031 are on title as tenants in common. That is allowed.
Speak with a 1031 exchange expert for the best way to set that up.
Updated over 3 years ago
Bill Exeter is a great resource to speak to about your 1031.
Generally, the fund will not qualify as "like-kind" property because a share/unit in the fund is not real estate. You are essentially selling an interest in real estate and then turning around and buying an interest in a fund (non-real estate).
@Will Barnard is absolutely right. You can acquire an interest in the real estate as a tenant-in-common with the fund. You should hold the tenant-in-common interest for at least 12 months; if it were me, I would hold as a TIC interest for at least 18 months and probably more like 24 months. You could then contribute the asset into your fund after the holding period. However, keep in mind, that a fund limits your exit strategies at the back-end, too. You will have the same problems.
You might want to research the possibility of using a Delaware Statutory Trust (DST) structure, although it may not be cost effective for a $1 million fund. You can 1031 Exchange into a DST and you can 1031 Exchange out of a DST, so you and your investors would have much more flexibility getting in and out of the fund.
Also, you may have already done this, but since you are raising funds, you should discuss your plans with a securities attorney to make sure that you do not unintentionally violate any securities laws. It is easy to cross the line without knowing that you have done so.
I had a follow-up thought. A simple and inexpensive solution might be using a land trust (Title Holding Trust). The Delaware Statutory Trusts (DSTs) and the Land Trusts are both "disregarded entities" so that investors can 1031 Exchange into and out of them with no limitations other than what your investment strategy calls for.
Yeah, the podcast from The Real Estate Guys had a good show on 1031 exchanges a few weeks back.
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