1031 and crowdfunding?

[Pearce G.]

Just listening to Noah Kagan on podcast #213.  He talked about parking his excess cash with a crowdfunding site like Peerstreet where he is in a 1st lien position.  Makes sense, but got me wondering if re-investing through a crowdfunding site could qualify for a 1031 exchange.  Let's say you sell a property for 100K and then re-invest all of it in a million dollar apartment development alongside other crowdfund investors.  Could that be your replacement property in a 1031 exchange?  I suspect the answer is no, because I don't see the crowdfunding sites promoting it...but I couldn't think of a reason why not.

Is there a reason why a crowdfunding site could not serve as a Qualified Intermediate?

Do 1031 exchanges prohibit syndication investments?

[Dave Foster]

@Pearce G., Crowd funding is the wild west right now.  There's no consistency between what any two "crowd funders" do or what it means to be a "crowd funder:" so you've got to look at each individual product.

To complete a 1031 the taxpayer has to take beneficial title to real estate.  If the crowd fund is set up to offer tenant in common interests in real estate then yes that could work as a 1031 replacement.  If it is set up that the client receives membership interest or shares in an entity that owns real estate then that would not qualify.

The exception (sort of) to this are specifically syndicated products that are sold as securities and set up so that client does receive a tenant in common interest in the underlying real estate asset. The most common of these is called a Delaware Statutory Trust. Another is the TIC or Tenant In Common.

A crowd funding site cannot both act as qualified intermediary and sell the product.  The QI must be an unrelated 3rd party whose only role is the administration of the 1031 process.

[Bryan Hancock]

I haven't seen any DSTs on the crowdfunding sites.  I was asked this question the other day and it is surprising that others haven't offered something like this.

My sense is that the funding period for crowdfunding investments in DSTs are so uncertain the sponsor via a crowdfunded investment may inadvertently blow your tax-favored status if the timing didn't work out properly.  This could be mitigated to a degree with pre-funding, but from what I have seen the "pre-funding" is more largely correlated with debt product to grant investors interest from day 1 and is less prevalent with equity investments.  I don't think debt would work unless some wizard knows how to do something like this.

So while possible I think it is unlikely to find investments like this. Crowdfunding will surely be transitioning to a direct model as time wears on so you can probably find sponsors that will take 1031 money into their DST if the money sourcing window is short.

[Drew Reynolds]

@Dave Foster is correct. Completing a 1031 exchange does not have to do with how the money is raised (crowdfunding, direct, etc), but does depend on the investor's ownership structure in the investment. There are really only 2 syndicated/co-ownership investment structures that qualify for 1031 purposes: Tenants-in-Common (TIC) and Delaware Statutory Trust (DST). Most crowdfunding investments are set up as LLCs or LPs, which are viewed by the IRS as an investment in a partnership or corporation, not in direct real estate.

@Bryan Hancock- DSTs are typically "pre-packaged" investments, meaning the asset is already owned and the DST sponsor then syndicates out the equity to 1031 investors. As the asset is already owned, an exchange investor can close in 2 or 3 days and there is little risk with blowing exchange timing for a motivated investor. You are correct that debt does not work as you are not holding a direct equity interest in real estate.

@Pearce G. There are 1031-specific crowdfunding sites, though not as numerous as the traditional crowdfunding sites (if "traditional" even applies to crowdfunding)... Full disclosure - my company is one of the them.  PM me if you'd like more info - in my efforts to be a BP "Good Samaritan", I'm happy to give you the contact details of our competitors as well. 

[Bryan Hancock]

@Drew Reynolds

That makes sense. What sort of returns are generally offered for projects by the DST sponsors? I'm assuming this is apartment syndication type money in the mid-teens on a 3-7-year horizon. Yes?

Are people still doing TICs?  I know they kind of fell out of favor a while back, but I still see them around from time to time.  

Do the sponsors have bridge money or capitalize the investments using their own capital for the DST?

There is a literal flood of 1031 money looking for a home.  We're selling a project in 78702 tomorrow to a 1031 buyer who is using about $900k to purchase the project.  The buyer used to be the head of Texas Teacher's Retirement System.  There literally has to be a flood of money looking for a service like what you're offering.  

[Mark Robertson]

Realty Mogul offers DST's from time to time The cash on cash is usually pretty low and the fees are tough to swallow. What you can't do is put 1031 money into the typical crowdfunding syndication deal. It would have to be structured as a TIC and getting loans on a TIC is a real pain, so most will not want to bother.

[David Thompson]

Most syndicates don't do it as my understanding.  The Delaware Trust is an option but costly and you are penalizing most investors for the few that are doing a 1031 to bother w/the extra cost.

[Natalie Schanne]

@Pearce G. - I googled 1031's a couple weeks ago and came across Kay Properties (http://www.kpi1031.com/). They facilitate about $100M of 1031's a year in DSTs and TICs. I spoke with Jason, one of the lead guys, for about an hour. He helps accredited investors place as much money as they want. They have an ongoing portfolio of deals you can vet and opt into. You have NO CONTROL. One example he gave was of a gentleman selling a $5M office building and spreading his $1M into 5 different projects.

I have NOT done business with the company. I'm more interested in continuing to buy and renovate (value-add) with my 1031's. But if you are an accredited investor looking for a passive investment, consider giving them a call. The deals they offer are sponsored by private equity firms. They said they can close in 3-10 days, so you sell property A and the 1031 escrow account transfers the money to the DST deal of your choice very quickly.

[Ian Ippolito]

@Pearce G.,  1031Crowdfunding.com had the largest volume of 1031 exchange investments when I did my last overview of all the sites.  Many of the DSTs are invested in  very conservative/safe assets like CVS/Walgreens, etc. They tend to have lower leverage than traditional investments.  

The downside is that 1031 investments usually come loaded with fees compared to non-1031. So unless you need it for the tax advantage, it may not fit your needs. 

 If you're interested in my detailed review of 1031Crowdfunding.com, BP does not let me put a link to my own site.  So instead just google "Real estate crowdfunding review 1031".  If you have any questions, just let me know. 

[Pearce G.]

Many thanks @Dave Foster @Drew Reynolds @Mark Robertson @Natalie Schanne and everybody else for all the great insights and discussion.  I'm not really looking for a way to do this right now, but others might be.  I was just curious.  You made me smarter.

@Ian Ippolito I have visited your website and found your crowdfunding reviews very useful.  You're providing a great resource.

[Ian Ippolito]

Thanks @Pearce G.!

[Tom Ott]

Originally posted by @Pearce G.:

Just listening to Noah Kagan on podcast #213.  He talked about parking his excess cash with a crowdfunding site like Peerstreet where he is in a 1st lien position.  Makes sense, but got me wondering if re-investing through a crowdfunding site could qualify for a 1031 exchange.  Let's say you sell a property for 100K and then re-invest all of it in a million dollar apartment development alongside other crowdfund investors.  Could that be your replacement property in a 1031 exchange?  I suspect the answer is no, because I don't see the crowdfunding sites promoting it...but I couldn't think of a reason why not.

Is there a reason why a crowdfunding site could not serve as a Qualified Intermediate?

Do 1031 exchanges prohibit syndication investments?

Personally, I have seen investors use 1031 to invest in multiple properties with one provider at a time. It just depends on your strategy.

If you are looking to crowdfund, I would look into Brelion. They have done some work with us in the past and are very great!

[Leslie Pappas]

Agree with @Dave Foster with his "wild west" comment. @Pearce G., you might consider using an investment advisor to evaluate which offerings are suitable and promising. Crowdfunding makes real estate easily accessible, however, in regard to institutional real estate investments, the advice of an expert who works in the industry every day, knows all the players and their track records, and performs due diligence on each offering is a great benefit to you and comes to you at no cost.

[Bryan Hancock]

Ha....an investment adviser will look for the investments that pay them the best.  Good luck finding one that will do what is right for their client.  You'll spend more time vetting the RIA than you will just doing the diligence on the sponsor yourself.  

BP is mostly for active real estate investors, most of which should be able to evaluate risk on their own.  

[Edward Fernandez]

Delaware Statutory Trust are not for everyone, but when you get to that age of getting tired TTT the tenants, toilets and trash the DST could be a fit. We as a company underwrite every DST that comes our way and if it does not meet or underwriting criteria we will not post it on our platform. These DST's do come with 8-14% loads on equity but it may be cheaper then paying the tax or even buying something that has not been fully vetting because you have run out of time. We will be issuing DST's soon in Senior Housing and Self Storage with the intention of compressing those fees.