Crowdfunding company with 1031 option?

Question

Hey all, My husband and I are going to sell two of our rental units this year and we are thinking about doing our 1031 exchange for the first time. Based on what I learned about 1031, our replacement property should have a value of 900K or more and the net proceeds we will get and need to invest should be around 550K.  We have the following questions:

1: My husband and I individually own that two rentals ( he owns and I own one) and we wanted to combine the proceed from both sales and 1031 to one new property under both our names. I know you can’t sell a property under an individual name and then buy the replacement under an LLC under 1031 rule. But I am not sure if our transactions would qualify for 1031.

2. For our next purchase, we are more focused on cash flow rather than appreciation. Ideally we want a cash flow of 3k on next investment, which is hard to find a Boston market. Then we found this crowdfunding company who claims to be able to do 1031 with estimated annual return of 6.5%. Their product is net leased portfolio DST.  We just started learning about crowdfunding and would like to hear your opinions on that !

3. This upcoming 1031 replacement property will be the biggest real estate investment for us, putting it into a crowdfunding sounds a little bit risky. But we are not sure if we can find a good mutli family in the area within the time limit. We haven’t tried to invest out of state yet. is there any other options we can consider? A little bit background: We still have a small rental which is generating cash and we bought our own home. We should have enough cash reserve if we end up buying a real property. We might qualify for accredited investors for crowdfunding.

Thank you so much for reading this and looking forward to hearing your thoughts !

Ian Ippolito · Answer

@Jasmine Lu, Crowdfunding is essentially just old-fashioned syndicating done online. So there would be no more or less risk than choosing a syndication, and you do the due diligence in the same way.

The big thing with DST’s is that on the plus side they generally do not charge a promote/carry because they are prohibited by SEC rules. On the minus side, they are usually sold through a bunch of middlemen who charge a whole bunch of extra fees, sometimes as much as 7 to 10%. And if you are dealing with a fairly conservative property, it may be unlikely to appreciate by that amount, when it’s time to sell, and so you may end up in the hole. So be sure to check out all the fees being charged and factor that in.

Jasmine Lu · Answer

@Ian Ippolito thank you so much for these advice! We will keep looking into these detailed.

Dave Foster · Answer

@Jasmine Lu, I doubt if you've got any problems with your scenario combining two different properties into one purchase.  Although you are on deed of one and your husband is on deed of the other both properties are the same taxpayer if you file a joint tax return.  It is that tax return that is the taxpayer.  So you could sell as yourself and he could sell as himself and you could buy as a married couple and that does not change the taxpayer.

Things get a little more complicated when you want to add an LLC to the mix.  But it is still doable.  If the LLC you set up is a single member LLC that chooses to be taxed as a sole proprietor then that LLC will not file it's own return.  All of the activity of the LLC will be reported on your personal return.  The IRS considers this to be a "disregarded entity".  So again, sell as yourself, sell as himself, buy as a disregarded LLC - this technically does not change the taxpayer and would be permissable for 1031 purposes.

I always counsel you to make the deeds match as closely as possible simply because it avoids questions and fluke situations with inexperienced field agents in an audit.  But a disregarded LLC does not change the taxpayer and could be a viable route for you to take.

Jasmine Lu · Answer

@Dave Foster thank you so much Dave for the confirmation! This is very helpful!

Kyle Kadish · Answer

@Jasmine Lu DSTs come in every shape and size.  Many of my clients like multi-family prooerties because they are familiar with that space, generally have a faster depreciation schedule, and sponsor is able to increase NOI - therefore valuation - versus commercial.

It is important to look at the sponsor, property, and tenant.  Good luck!

Paul Moore · Answer

Hey @Jasmine Lu.  Just saw this old post since I am into DSTs.  What did you decide to do?  Give us an update.

Jason Merchey · Answer

So I am taking it that the main issue is the front-end load for a Delaware Statutory Trust meant to defray capital gains taxes before the time runs out?

Jasmine Lu · Answer

@Kyle Kadish thank you Kyle ! We are now thinking about maybe doing a mix of crowdfunding and a small multi. Will definitely stay open to both opportunities.

Crowdfunding company with 1031 option?

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