What types of Syndicatoins or Similar Arrangements qualify 1031?

4 Replies

I am wondering if some could provide a simple explanation, or point in the right direction, to help me understand what types of Syndications or other forms of joint but passive ventures qualify as the 'reinvestment' part of the 1031 transition puzzle?

Part one - my understanding is that you must be buy into a DIRECT interest in real property, vs buying shares of an LLC or other entity that THEN invests into real property. Is that the right line of thinking?

Part two - my assumption that you must be an 'equity partner' and not a 'lender' into the new partnership? I assume that is how most syndicated deals are structured as far the the 'partner' portion goes?

Part three - I realize there are lots of these opportunities out there for those of us who want to go 'search them out'. I am wondering if there is also a 'ready market' or brokers out there who specialize in these types of deal structures? 

I am mostly wondering as part of the strategy I have been working for finding new properties to but is locating 'almost ready to retire landlords' who are open to the idea of selling and getting rid of the 'day to day' but are concerned about the taxes dues and what/where they could put their funds to keep earning a good return. 

Thanks, Dan Dietz

Updated 5 months ago

One other question, which I assume the answer is no to is this; could those newly invested properties that we would invest in together include any of HIS existing units? He currently holds them in a trust, we would be investing in new ones as a partnership.

@Daniel Dietz

Part one - spot on.  the 1031 must be the sale of real estate and the purchase of investment real estate.  Although the purchase of an interest in a Delaware Statutory trust is considered to be an interest in the real estate itself.

Part two - Again spot on.  An equity partner owns the real estate and thus shares in the equity.  A lender to the real estate is only holding a note/security.  Not valid for 1031.

Part 3 - You'd be surprised how limited the field is. Most syndications that are using OPM and debt to function have to set up their projects as LLPs or LLCs that own the property and the lender lends money to the LLP. In that event the lender is usually unwilling to allow their security interest in the property to be diluted by a tenant in common investor who has to take title to a % of the property because they're in a 1031. It just usually doesn't happen.

Delaware Statutory Trusts and Tenants In Common are the two main venues for this type of passive investing that is 1031 compliant. Each has it's advantages and disadvantages.  

Your idea is excellent and I'm already seeing the trend with our clients. There's two really smart and tired investors at the end of the game and at the end of a market will make using the 1031 exchange - They go from active to passive and they go from appreciation markets to cash flow markets.  

So the opportunity for young studs like yourself is to provide them with the golden parachute that allows you to continue to leverage up while they float down to retirement.

I've seen the trend in multiple market cycles I'm that old.  I'm seeing it now ramping up quickly.  And I believe in the consistency of the trend.

Good plan

Hi @Daniel Dietz

You must acquire a direct interest in real property in order to satisfy the "Like-Kind Property" requirement under Section 1031. The purchase of a membership interest in a multiple member LLC or a partnership interest in a general partnership or a limited partnership or shares of stock in a corporation would be considered a purchase of a "personal property" interest (non-real-property) and would not be considered to be "Like-Kind Property" for 1031 Exchange treatment.

You must be an owner for tax purposes, which would be an equity partner.  

Syndications and/or passive investments that generally qualify are often structured as one of the following: 

  • Sponsored (syndicated) Tenant-In-Common (TIC) Investment Properties
  • Sponsored (syndicated) Delaware Statutory Trust (DST) Investment Properties
  • Certain sponsored (syndicated) oil and gas interests/rights
  • Sponsored (syndicated) Net Lease Properties (NNN) often through a DST
  • Non-sponsored (syndicated) Net Lease Properties (NNN) acquired through a real estate broker

There are brokers that specialize in syndicated TICs and DSTs.  The vast majority of them are sold as securities and are sold through boutique securities firms.   There are still a few that are sold as real estate (not securities).  There are also real estate brokers that specialize in net lease property and oil and gas interests.  

You must be very careful if you plan to put a syndication together to acquire and/or sell syndicated properties so that you do not inadvertently violate any securities laws or regulations by selling a deemed security without a securities license.  You should consult with a securities attorney to ensure that you are not unintentionally crossing any lines. 

@Daniel Dietz I could provide you some more educational info on DSTs if you want, including showing you one actually being offered right now of multi-family in Colorado. There are some qualification rules/minimums when buying a DST as part of a 1031 exchange but I can explain those.

Thanks for all the help on this, much appreciated. 

To take things one step further in understanding the permitted types of ownership, I will elaborate on one possible sale/deal I have been working on.

There is Seller A, who owns quite a few 4 plexs around town and most are paid for and he has god cash flow, but is getting older and thinking about slowly getting out of the day to day of things. He is concerned with paying taxes of course. These 4 plexs sell for around 300K in good condition.

There is also Seller B who is not as concerned about taxes having not owned his properties as long so not as big of issue. 

Let's say Seller A sells me one of his 4 plexes and I put down 60K and get bank lending for the rest. Now he ALSO wants to reinvest that 300K I just paid in WITH me as a 'silent partner' into a couple of Seller B's properties. The idea would be that he could keep getting a good return without and of the day to day responsibility. 

When I asked before on here it sounds like this is perfectly legal way of doing things. The thought would be that he would bring the down payment from the procedes of the units I just bought from him. Let's say we used that 300K as 20% down payment on 6 duplexes from Seller B and do a loan for the remaining 80% needed. I would do all acquisition, rehab if needed and day to day PM. 

Our thought was to form an LLC, partially for liability protection (he has a lot more assets than I do) and also for the flexibility in how to share profits and losses regardless of capital contributions.

Is there a way to do that and still stay in the parameters of buying 'real property' and not 'shares of an entity'? It seems like he would still be buying the real property, just in the structure of an LLC.

Thanks again for all the advice. Hopefully it is helping others out there reading along too!

Dan Dietz

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