Can I use proceeds to 1031 into a syndication deal?

3 Replies

I haven't seen a post on this (but it may exist). Thanks to opinions and analysis from the BP community we are selling our ‘poor deal' SFH investment property in NC and after improvements and fees we will realize about $20-$25k in gains.

A few questions: (1) is it too late to do what is needed to turn this into a 1031 exchange situation (we close on 8/30)?

(2) I think the answer to this is NO, but can we use these proceeds to invest in an apartment syndication? Or a note investment?

(3) Since I’d prefer not to invest in real property - does that mean we just pay tax on the gains and take what remains into notes?

Thanks to 1031 experts.

@Russell R. , You're certainly not too late to the party to do a 1031.  Your qualified intermediary must be in place prior to the closing of the sale.  But with a closing of 8/30 you've got time.

As far as your other two questions

- The 1031 exchange requires that you sell and purchase actual investment real estate (or an IRS approved 1031 compatible fractional product).  The problem with most syndications is that they are structured so that you are not buying real estate.  You are buying an interest in a partnership that owns real estate.  That won't qualify for 1031.

- There are a few passive 1031 compatible opportunities, Delaware Statutory Trusts and Tenants in Common that you can use.  However, if you're set on a syndication at this point an option would be to simply pay the tax and then use the proceeds to move into a syndication.

@Russell R. 1031s are "like kind" exchanges and as noted above require you to exchange investment real property for investment real property. A member's LLC ownership interest in a syndication or an ownership interest in a note is considered personal property and does not qualify.

As noted above, you can look at DSTs. You can also explore a TIC ownership with a syndicated LLC in which you and the other LLC each own undivided partial interests in the real estate. In either case, make sure you have competent counsel advising you.

This question comes up all the time. I'm not a CPA by any means, and you should hire a firm that specializes in real estate. 

But I do know that under the new tax regime, our investors that redeploy capital within a calendar year into our subsequent large deals pay little to no capital gains/tax. This is due to the cost segregation, bonus depreciation, and accelerated depreciation that is now allowed to be written off in year one. I'm happy to elaborate via a PM if anyone needs clarification.