How 1031 Crowdfunding works: How are investments sourced?
To complete a 1031 exchange, the taxpayer must take title, which means ownership in his/her name or the name of an entity to the property. Exchanging property within a syndicated LLC or limited partnership does not qualify one for the 1031 tax benefits. That's because an LLC or limited partnership is ownership of an entity, not direct ownership in real estate.
Aside from buying the entire property yourself, there are really only two syndicated/co-ownership investment structures that qualify a taxpayer for 1031 exchange benefits:
- Tenant In Common (TIC): Ownership between two or more investors who must take an active part in decision making. Owners must maintain control of the property and unanimity to sell, refinance, and make decisions that affect property management.
- Delaware Statutory Trust (DST): Ownership is titled in DST and managed by a trustee, and investors don't take part in active decision making.
With a DST, the DST is on the title of the real property and investors of the DST become beneficial owners of the trust and, by default, have direct ownership in the real property within the trust, thus qualifying for a 1031 exchange. DSTs are typically "pre-packaged," meaning that the real estate asset is already owned and the DST sponsor then syndicates out the equity to 1031 investors.
When acting as a sponsor, 1031 Crowdfunding acquires and closes on commercial properties through its affiliate company, 1031 CF Properties LLC, and then places the properties into a DST. Through the DST, you can co-invest with other 1031 exchange investors in one or several properties.
When you invest in a DST on 1031 Crowdfunding, you are assigned a fractional ownership of equity and debt, fulfilling your 1031 exchange requirements. You'll get the necessary tax documents you need for your 1031 exchange:
- A 1099 to file with your ordinary income.
- A 1098 detailing your mortgage interest write-off.
- An operating (or profit and loss) statement for depreciation deduction and recapture.
Here's how the process with 1031 Crowdfunding works:
- 1031 CF Properties LLC, or a third-party sponsor who has been screened by 1031 Crowdfunding, pre-vets, acquires, and closes on a real estate deal and places the properties into a DST, and the offerings are placed on the platform.
- Anyone can create an account, but only pre-qualified investors are given access to browse DST offerings on the site. DST offerings vary in debt levels and differ in property types, regions, and values.
- Once you have been verified as an accredited investor, you can purchase units in the chosen DST. Your qualified intermediary wires the funds to complete the purchase, and you are a beneficiary member with ownership rights in the DST you've selected.
- You receive purchase confirmation followed by regular updates and distributions. Experienced DST officers and property managers operate and manage the property or portfolio for you.
- DST trustees sell the property at the designated time and distribute final proceeds to the qualified intermediaries of all investors and complete a 1031 exchange. You now have the option to find a replacement property through 1031 Crowdfunding or other sources.
One of the requirements for a 1031 exchange is to take on "equal or greater value" in the replacement property you are exchanging. If debt is needed, the DSTs on 1031 Crowdfunding's crowdfunding platform are already funded with nonrecourse financing in place.