1031 and Syndication?

11 Replies

Hello bigger pocket family. My husband and I are researching syndications and would like to begin investing in them but we are wondering if anyone has knowledge if we can use a 1031 to get into a syndication.

Any information or recommendations would be greatly appreciated.

Some syndicators allow 1031 investors but most don't. To accommodate 1031 they have to split property ownership between a 1031 owner and their holding company. That creates a "tenants in common" or TIC structure. The whole thing becomes more complex than a usual syndicated deal.

@Nick B. @Diana Dorantes

Nick’s answer is accurate.

To add a little detail to his answer, the 1031 TIC syndication structure is generally only open to 1031 amounts of $500,000 and more likely $1,000,000 or more.

Basically, you need to have enough cash to invest where it is worth the syndicator's time energy and expense to create the TIC.

I also believe the 1031 TIC investor would also need to sign on the loan.

All this being said, there are syndication investments available to 1031 investors, there just aren’t many.

@Diana Dorantes , In a 1031 exchange. you are selling actual investment real estate and purchasing actual investment real estate.  In a syndication you are usually buying a membership interest in an entity that owns real estate.  This wont qualify.  As @Nick B. said, sometimes a syndication can spin off part of the real estate and sell you the actual real estate so you actually end up being a "partner" or tenant in common with the syndication.  But these are few and do generally require a high investment amount.

If you're looking to simplify and move into a passive environment Delaware Statutory Trusts offer the passivity and are compliant with 1031 exchanges.  So you can defer the tax and continue the tax breaks of real estate ownership.  While eliminating personal debt as well.

Hi @Diana Dorantes too bad we didn't meet a month ago. We set up our current syndication with the TIC structure, and as the other say, the minimum is lofty due to the costs and work associated with it. In our case, the minimum was $750k.

You do not have to sign on the loan per se, but you do have to be on title. In our case the person doing the 1031 needed to form an LLC, and be comfortable with allowing the operators to manage that LLC. You need to sign various credit authorization forms, as well as provide a statement of real estate, so it is very similar to signing on the loan. All the documentation must satisfy the lender, 1031, SEC and IRS.

There is some work, but it can be done. As stated above, it is not that common.

@Nick B. @rick Thank you for the explanation.  I didn’t think I could do, but wanted feedback from other experienced investors who are more knowledgeable about syndication as well as 1031.

@Rick Martin , @Dave Foster , @Arn Cenedella thank you also for in depth explanation. I'm not quite at the level for a TIC structure, but perhaps in the next few years.

Looking forward to expanding in real estate investments.

@Diana Dorantes to add to some of the comments above, I looked into DST's, as well, and spoke with a few people who offered them. What I discovered is that they are typically in class a complexes, yielding maybe 4% a year, really not worth it to avoid capital gains. When I crunched numbers, if we sold one of our houses and put the proceeds into a DST, we'd still be far better off taking the capital gains hit and putting that money into multifamily syndications, which should yield around 20% per year, annualized.

Re 1031 into syndications, you can do it with some, but generally that's done from one asset with a syndicator into another. One of the syndicators I raise capital for has started to implement this.

Happy to chat further with you offline, I'm SEC registered, raising capital for private placements, working only with syndicators with a strong track record. We generally work with accredited investors, but also have the occasional opportunity for sophisticated investors, as well. 

On a personal note, we will very likely sell a rental, and put the proceeds into 5 or 6 rentals, next year. 

Updated about 1 month ago

Need to make a correction, meant to say will sell my rental and put it into 5 or 6 multifamily syndications, as a much more relaxing approach to the real estate market, with similar, if not often superior, returns.

Great replies here and agree with Elizabeth. 

I found out that you can also put the 1031 debt into Enterprise Zones.

I'm searching good syndicators with strong track records.  We're currently vetting a 1031 deal now w/ a syndicator and looking for property backups as we speak. In anticipating the sale the current property at 1.4, we have about half of our target amount already which satisfy, but could consider all the way up to 2.3m.  

Hi @Diana Dorantes , is there a particular region in the country you are looking for to invest in? But syndication is a great tool to begin investing in multifamily projects. Some syndicators allow 1031 but the majority don't. If you have anymore questions please let me know. Thanks 

@Diana Dorantes , there is an alternative to 1031 when it comes to sheltering capital gains. If you invest in a syndicated deal that uses cost segregation depreciation method, you have a high chance of writing off up to 80% of your investment in the fist year. Most syndicators use cost segregation these days, so no problem finding them.

Hypothetically, if your profit from sale is $100K and you invest it all in another deal, your write-off may be $80K. Then you only pay taxes on $20K. If you add some other money and invest $125K, your write-off would be $100K - right on the mark to offset the entire gain.

The beauty of this method is that you don't have to invest all that money in a single deal. You may spread over two or three, just make sure that the sale of your property and these new deals closed in the same calendar year.

If you have other investments that accumulated depreciation over the past years, that depreciation can be used to offset your capital gain as well. No need for 1031 there.

DISCLAIMER. I am not a CPA and this is not a tax advice. Please consult your CPA for your particular situation.

@Elizabeth M Williams I will look a little closer at the numbers to see if taking a small hit now may actually be beneficial later. 

@David Davidson Congratulations on your anticipated deal.  Good idea to look into Enterprise Zones... I guess this would be best IF the Syndicator was well versed in these specific type of deals.  I'm guessing with the results of 2020 the government will probably offer more of these Zones.