Can I roll over single family rental proceeds to CF deals?

Question

Hi -   I am a passive investor thru PoL, RealtyMogul, etc..   In addition I have one single family home that I purchased 7 years ago and rented ever since.  I plan to sell that home in 2017.  My question is:

Can I take the profits from the single family rental sale and use the 1031 exchange rules to buy passive RE investments thru these crowdfunding portals?   I notice SOME of the CF investments say "1031 Eligible", but most don't.  Would I be eligible for all Crowdfunding deal, only the 1031 Eligible deals, or none?

Thanks for your advice!

Drew Reynolds · Answer

Hi @Jim Wagoner, the ability to roll over proceeds into a multi-investor vehicle has to do with the legal structure being used.  Generally speaking, the crowdfunded legal entity would need to be structured as a tenants-in-common (TIC) or Delaware Statutory Trust (DST).  So you would likely be limited to the "1031 eligible" investments.  Note that TIC and DST structures are typically restricted to Accredited Investors and may have higher minimum investment amounts than other "crowdfunded" investments

Robert Hetsler · Answer

Although I am extremely familiar  with 1031 Exchanges; however,  I am not nearly as familiar with the crowdfunding deals.  As such, I believe @Drew Reynolds, @Ian Ippolito and @Jeff Wallenius both identify the "hotspot" issues in terms of ensuring you comply with the entity structure rule.  If you keep in mind that core concept that the tax payer is the one that receives the benefit of the exchange, you should be fine.  In otherwords, you would need to make sure that the same legal seller is the same legal buyer of the replacement property.  For this reason, partnerships are often something that does not qualify unless all partners are in agreement.

However, the items mentioned above like a Tenants in Common structure would be fine.  As pointed out by the prior comments, if the asset does qualify for 1031 tax treatment, it is likely their will be specialty assets that promote the fact that they are 1031 Compliant as their goal is to secure as much exchange money as possible.  In those cases, they will likely provide you with all the data to support the fact that they are compliant.  Contrarily, if they are not compliant, they likely will be silent on the issue, which is a red flag.  Either way, it is prudent to do your own research.  I know that I would be able to answer that question for you as well as @Dave Foster, a minor celebrity on the site, and @Bill Exeter are also both capable of  responding to the questions after we are provided more facts and the information on the potential replacement property.

As such, you just want to ask the questions to the crowdfunding firm and also ask for support if they indicate that it is 1031 Exchange Compliant Property.  Essentially, like all prior comments stated, just ask the questions and put the burden on them as a first step to ensuring you are not wasting your time on property that does not qualify.  I hope this provides some value.

Ian Ippolito · Answer

@Jim Wagoner,  you can usually find those dedicated 1031 deals here and there on the different sites,  but they are usually few and far between . There are a few CF sites that specialize only in 1031 deals such as 1031 Crowdfunding.

Jim Wagoner · Answer

Hi All - Thanks for all the input...   I'll engage/investigate the folks over at 1031 Crowdfunding, or ensure the property I invest in is 1031 compliant - be that thru a private syndicate or one of the more public crowdfunding portals.

Again, thanks for all the spot on advice!

Mark Creason · Answer

Dave,

I agree with your point about crowdfunding being the wild west.  Crowdfunding hasn't been vetted enough if you ask me.

Mark

Dave Foster · Answer

@Jim Wagoner, the ever modest celebrity himself, @Robert Hetsler and celebrity-in-making @Drew Reynolds are spot on correct.  The issue here is really with the name "crowdfunding".  It's an internet age slang that has no official or even usual meaning of usage.  So you've got to examine  every different "crowdfunding" offering and company offering it individually.

I've seen "crowdfunding" offerings range from a DST product packaged for millenials by marketing them as "crowdfunded".  With the right structure these would qualify for 1031 treatment.  I've seen "crowdfunding" projects where you truly own a tenants in common % of the replacement property.  These would qualify for 1031 treatment.  I've seen "crowdfunding" opportunities where what you're really buying is a small interest in a non-recourse entity hoping that it will actually buy a piece of investment real estate and manage it.

Think of crowd funding as the wild west - potential riches but Unregulated, Untested Unproven.  The best way to deal with rustlers after your money is to have a good posse on your side including legal, accounting and a QI to vet with you.

Jeff Wallenius · Answer

@Jim Wagoner it will be difficult as Drew stated to roll your profits into a crowdfunding investment vehicle. What are your long term goals with those profits from the sale of your rental property? The answer to that question may provide options on where to move your profits for the best returns.

Jim Wagoner · Answer

Hi @Drew Reynolds -

Thanks for the quick and complete reply. That helps.

Jim

Can I roll over single family rental proceeds to CF deals?

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