Getting Creative with 1031 Exchanges

Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes

Seeking some advice on how to proceed with a potential investor.

I have someone who is ready to throw in a significant amount of money to invest into our real estate offerings and the situation has become a little... Tricky. They are in the the process of selling a large commercial portfolio and they want to use the proceeds from that sale to invest into our platform. They (obviously) want to limit their tax liability so in order for this to work we'll need to find a way for them to utilize the 1031 Exchange.

Does anyone have any suggestions here? Could we potentially form an entity where they are the majority shareholder and use that to invest? Could we place them as first deed holder and do it that way? Any thoughts/suggestions would be greatly appreciated!

-Bryan

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Michael Skoczylas

Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes

@Bryan Beal I see at least 2 options for you. 1. Sell TIC interests to the investors and 2. Form your own DST. Both of these can be complicated, but may be worth it for you if the 1031 investor is big enough.

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Rob Pecha
Specialist · New York City, NY · Member since 2019 · 53 posts · 28 votes
6y
@Bryan Beal whenever 1031s get tricky I often interject with DSTs as a potential solution to 1031 problems, but it sounds like you’re trying to put together an offering of your own so that probably wouldn’t be applicable here. Maybe for some boot at best? Dave Foster will be super helpful as usual, I am sure. Best of luck! 👍
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Bryan Beal
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Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes
6y
Thanks @Rob Pecha - appreciate the quick response!
In essence, we'll be identifying individual properties for this investor - physical addresses so they can report on those. Let me also say that this individual is very close to me (family, in fact) so take that for what it's worth.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Bryan Beal, 5 of my favorite words ""getting creative with a 1031" !!! the family situation might be an issue or it may not depending on entity structure. Family members invest together all the time. It's just how you set it up.

If you're simply bird dogging properties and they are buying them then that's easily enough done with just a garden variety 1031 where the entity selling the commercial portfolio does the 1031 and purchases the new properties.
If the numbers are big enough that finding good replacements in the time frames is a chore then reverse exchanges or improvement reverses might be a good fit. They can absorb a significant amount of 1031 dollars to provide the forced appreciation of a value add property.
If you're planning on taking an equity stake then you'll want to look at either a tenant in common situation or a conversion into a 3rd entity post 1031. Or even a 721 Upreit type of structure only done outside a reit.
The one that that won't work is forming an entity and then selling them the membership interest in it to satisfy their 1031. The 1031 must be a purchase of actual investment real estate.
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Michael Skoczylas
Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes
6y
@Bryan Beal I see at least 2 options for you. 1. Sell TIC interests to the investors and 2. Form your own DST. Both of these can be complicated, but may be worth it for you if the 1031 investor is big enough.
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