Hi BP community, I am about to kick off a syndication/raise for a great multifamily property in the midwest, and a few potential investors have expressed concern around investing given they would want to be able to INDIVIDUALLY 1031 their profits into a new property in 5yrs when we exit. I've done a lot of reading on different strategies, and am trying to understand which is the most applicable. It sounds like structuring the deal as a TIC upfront is very difficult from a lending standpoint? It also sounds like a Drop and Swap can get hairy if done at the end of the hold period, especially with a promote structure. Is there a way to just pay out the investors that don't want to 1031 at the end of the hold period, and execute the exchange with the remaining group? Is there a tax consequence for those investors you buy out? Any clarity is very much appreciated.
Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
6y
1031s with syndications can be tricky. You'll need to do a TIC, which lenders typically aren't too fond of. Kelley Clarke is an expert on that if you decide to go that route.
You don't necessarily have to "buy out" all the investors who think they want a 1031, but rather find a solution to the problem they are trying to solve -- How to pay less tax.
At BAM, we have been getting a "1031 Effect" through cost segregation which will offset other income in the "passive" bucket. The gains that come when we exit a deal can be reinvested into the next opportunity tax-efficiently because the new deal will have additional losses to offset those gains. This has been the case since the tax-change in 2017.
I'd talk to an up to date CPA that can help to understand the ins and outs of your personal situation.
Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
6y
@Ken Martin, I have seen something like this been done but it is a complex topic that requires input from legal (SEC and RE) counsel, CPAs and a lot of coordination across the investors.
Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
6y
1031s with syndications can be tricky. You'll need to do a TIC, which lenders typically aren't too fond of. Kelley Clarke is an expert on that if you decide to go that route.
You don't necessarily have to "buy out" all the investors who think they want a 1031, but rather find a solution to the problem they are trying to solve -- How to pay less tax.
At BAM, we have been getting a "1031 Effect" through cost segregation which will offset other income in the "passive" bucket. The gains that come when we exit a deal can be reinvested into the next opportunity tax-efficiently because the new deal will have additional losses to offset those gains. This has been the case since the tax-change in 2017.
I'd talk to an up to date CPA that can help to understand the ins and outs of your personal situation.
Specialist · Scottsdale, AZ · Member since 2020 · 9 posts · 36 votes
6y
@Andrew Hogan
Great insight Andrew!
We have helped a lot of clients with that very same technique. The current “bonus” depreciation rules allow for some impressive tax write offs with Cost Segregation.
Most companies like ours will put together free estimates to help syndicators show investors the kind of savings they might be looking at
Syndicated 1031 exchange programs were expected to raise an estimated $800 million in 2015. The actual amounts raised by these programs in 2015 exceeded $1 billion. Midway through 2016, estimates for the year's equity raise reached $1.4 billion. The actual amount was $1.46 billion, according to Mountain Dell Consulting, LLC, an independent consulting firm and affiliate of Orchard Securities, LLC, a registered member of the Financial Industry Regulatory Authority, syndicated.
Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
6y
@Ken Martin - I gather you have investors that say they want to 1031 when the current property is sold. The rule as I understand it, is that the entity that sells is the entity that buys. I have seen this done ONCE and when asked I say it is technically possible, but practically improbable. If you select your investors who all plan very long term, if the lead team executes well such that all the investors are happy, if you make a profit, if none or very few want to take their profits out, etc, it is possible for the property owning entity, likely an LLC, to sell property A and buy bigger property B with the proceeds. I know of no way individuals in a syndication can take their portions and separately 1031.
The TIC was mentioned as that creates separate owners of property A, but they are then material participants in the business not limited partners. I seen this used with folks who are doing 1031s and rolling into partnerships with syndications, that is syndication and TIC are partners sharing the business.
The Cost Seg & Bonus Depreciation are great for the RE Pro (much better) and good the non-RE Pro (OK, but not on the first deal). The RE Pro can offset earned income, this means not paying taxes today at a high income rate, but paying later at a Cap Gain rate (or passing on and avoiding this tax - but your DEAD!). The non-RE Pro can use the depreciation against passive gains; say you are a serial RE syndication investor, when you sell one with that big gain, use the accumulated depreciation from previous properties and current purchase properties to avoid the tax on the gain. My accountant has explained (multiple times) some related technique that enhances this, but to avoid sounding really stupid, I suggest talking with the real experts.
Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
6y
@Charles LeMaire offsetting real estate professionals' earned income is a game-changer! We've been getting more brokers, realtors, and 'do it your selfers' that are taking advantage of that.
Just have to make that 750hr/yr min. threshold and devote more time to your real estate than any other job :)
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
Most of these are better off as a TIC structure since being a DST adds one more layer and is treated more as a stock sale than property sale so may be licensing issues. However, you're going to have to have a plan:
1) Operating agreement - Syndicator needs to stay in the deal and probably do asset mgmt until unwinds
2) Accounting - Going in, to get the full 1031 deferral, you're going to need to break down the deal for each investor by their share of debt, equity and price so they can get the deferral Same thing when you unwind.
3) Ongoing accounting - You'll need to figure how to handle capital calls (which you want to avoid since most investors are passive and looking at yield/capital preservation). You'll also need to allocate payouts and tax shelter for mort int and depreciation of the asset.
When you unwind, its more up to the investors if they individually want to roll into another 1031. However, you'll need to provide the same accounting to all.
Get a tax professional to setup the TIC, you need it.