We are often asked how one can 1031 exchange a property they own into a syndication. This tax deferral strategy while common for properties you own 100% is a bit more complex and not as common in the real estate syndication space. However, it can be done.

As a reminder 1031 is a section within the IRS code that allows one to exchange one property for another and thereby defer the tax on the gain from the sale. One can 1031 exchange properties indefinitely, until one passes away, at which point title would transfer to one’s successor at a market (vs. cost) basis minimizing the successor’s tax liability. The replacement property must be identified within 45 days from and the exchange must close within 180 days from when the relinquished property closes the sale.

In order to 1031 exchange into a syndication, the sponsor would typically have to set up a Tenant In Common (TIC) structure. The TIC structure means that all TIC members have joint and several ownership with equal control.

Typically the sponsors have control over the deal and would not want to relinquish day to day management decision or voting power to a passive investor who may or may not have the experience relevant for managing the subject property and executing on the business plan. There may be a way to structure around the management and voting power of the TIC owners (e.g. via a side letter). However, as always it is best to consult with your syndication and real estate attorney on how to approach this.

In addition, depending on the ownership share, lenders would do due diligence on and may also underwrite the TIC owners. This involves running their credit reports and background checks as well as requesting their personal financial statements and real estate schedules.

Keeping up with the 1031 exchange deadlines noted above coupled with the additional legal paperwork and lender requirements makes it costly and requires additional work, legal fees, and effort. Therefore, it is not uncommon for sponsors to require higher investment minimums for 1031 exchange investors – e.g. $500K or more.

For an existing syndication and assuming all owners (GPs and LPs) agree to it, it is also possible to perform a 1031 exchange into a new syndication. As usual one must consult with the qualified intermediary (the one in charge of handling the 1031 exchange to ensure it complies with all requirements), your CPA, and your attorney to ensure one avoids any pitfalls.

While we do not have an internal 1031 syndication process set up today, we are continuously looking to partner up with experienced sponsors who have an established and vetted process in place.

Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.

Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.