Can you 1031 Exchange into a syndication as an LP?
Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes
Can you 1031 Exchange into a syndication as an LP?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes@Brian Kantor, There's really two issues here
1. They don't own real estate now. So there is nothing for them to 1031. What they own is a membership interest in an entity (the partnership LLC) that owns real estate. The LLC can sell and do a 1031. But all partners have to go forward together since it is the LLC that owns the real estate. Or they may choose with the advice of their accountant to dissolve the LLC prior to the sale and distribute the property to each former member as a tenant in common (there's that phrase you've been hearing - it means that multiple people own real estate - it just happens to be a % of a larger piece). Then they own real estate and can do a 1031.
2. The second issue, once they resolve issue #1 is that they cannot 1031 into a position as a member of a limited partnership for exactly the same reason. They are not buying real estate. They are buying a membership interest in an entity that owns real estate. As several folks said the only way to make this work is if the LP can carve out a piece of the actual real estate and sell that to you so you become tenants in common.
The 1031 Investor5137 Reviews
26 Replies
- Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes4y
Yes they can 1031 into a syndication. It requires a little different structure than just investing as an LP in a syndication. It is setup as a tenant-in-common (TIC). The other point to consider is that operators typically have a much higher minimum investment for TIC setups since you have to re-structure the deal. We normally have a minimum investment of $500k but others I have seen do a $1 million minimum.
- Specialist · Member since 2021 · 322 posts · 273 votes4y
Quote from @Brian Kantor:
Hi there. My parents are selling a commercial property they own in full that's held in an LLC (of which they are partner members. Can they 1031 exchange the proceeds from that sale into a syndication deal as a limited partner? If so, what would be the stipulations or things to consider?
Thanks!
As Charles said there are ways to do it, generally speaking there are high barriers to do so though. Best of luck!
- Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes4y
Thanks so much for the tips @Colton Hahn and @Charles Carillo!
- 4yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
They should look into UPREIT or DST exchanges as well.
Based on your post, I'm not sure if they even qualify for 1031, who are the other partners? are they coming along?
- 4yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Brian Kantor, There's really two issues here
1. They don't own real estate now. So there is nothing for them to 1031. What they own is a membership interest in an entity (the partnership LLC) that owns real estate. The LLC can sell and do a 1031. But all partners have to go forward together since it is the LLC that owns the real estate. Or they may choose with the advice of their accountant to dissolve the LLC prior to the sale and distribute the property to each former member as a tenant in common (there's that phrase you've been hearing - it means that multiple people own real estate - it just happens to be a % of a larger piece). Then they own real estate and can do a 1031.
2. The second issue, once they resolve issue #1 is that they cannot 1031 into a position as a member of a limited partnership for exactly the same reason. They are not buying real estate. They are buying a membership interest in an entity that owns real estate. As several folks said the only way to make this work is if the LP can carve out a piece of the actual real estate and sell that to you so you become tenants in common.
The 1031 Investor5137 Reviews - Pasadena, CA · Member since 2019 · 136 posts · 148 votes4y
@Brian
Another option is a Delaware Statutory Trust. This allows for up to 499 investors to participate as fractional beneficial interest holders in a syndicated real estate portfolio.The language is important here: it’s NOT a limited partnership. But it has many similarities.
There are some DST posts on this forum if you do some searching.
I could go pretty deep down that rabbit hole with you if interested, but this format is difficult
- Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes4y
@Dave Foster and @Ronald Rohde, my parents are the only members of the LLC that owns the property. They each own 50%, so any move would be the two of them together.
@Jon Taylor, you are the second person who mentioned this. I did some digging already, and this seems like a more compelling solution than a syndicate for a few reasons:
1) This way they don't have to keep rolling over into a new syndicate every 5 to 7 years (or get the tax burden at that point)
2) The tax efficiency seems to be strong for them as they pass ownership to their heirs after they pass away
- Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes4y
Quote from @Brian Kantor:
@Dave Foster and @Ronald Rohde, my parents are the only members of the LLC that owns the property. They each own 50%, so any move would be the two of them together.
@Jon Taylor, you are the second person who mentioned this. I did some digging already, and this seems like a more compelling solution than a syndicate for a few reasons:
1) This way they don't have to keep rolling over into a new syndicate every 5 to 7 years (or get the tax burden at that point)
2) The tax efficiency seems to be strong for them as they pass ownership to their heirs after they pass away
Hi Brian, feel free to check out this quick blog on DSTs, happy to answer any questions.
- 4yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
They could always invest in a syndication - I know you said you weren't sure about that because they would have to invest again after 5-7 years when the deal goes full cycle. That is true, but using the depreciation from a cost segregation in a syndication is the most flexible option. You aren't locked into a complicated situation like a 1031 or DST, but you can still defer the taxes. Depending on the amount of money you are talking about and the number of syndications they invest in, they would not need to reinvest frequently. There are certainly other options, but I don't know of any that generate returns without complexity like syndications do!
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes4y
I don't know why people do 1031s???
In 2018 I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.
The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).
Its a way of kicking the can down the road with taxes. I would use a 1031 in the last case resort since you have to pay taxes at some point unless you are going to take it to the grave with you and get the step up basis (so there is an exception if you are pretty sure you are on your last 5-10 years of life) which is not very practical due to the following.
1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.
2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2M for it to make it worth the administrative burden. - Investor · Member since 2019 · 74 posts · 70 votes4y
What if you had $200k passive loss built up, but your 7 SFHs resulted in a $5M capital gain? Would you still have gone with the syndication route?
- 4yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
Quote from @Daniel Han:
What if you had $200k passive loss built up, but your 7 SFHs resulted in a $5M capital gain? Would you still have gone with the syndication route?
I don't want to speak for Lane - but why not? If you take the gain from selling your SFH's and invest it in new syndications, you can generate enough passive loss to completely offset the gain. Much less complicated than the whole 1031 process - and you can get in multiple syndications in multiple asset classes with multiple sponsors so you are diversifying as well. With the 1031, you will be all in with one property with no diversification.
- Investor · Member since 2019 · 74 posts · 70 votes4y
let's say you invest the entire $5M into syndication which generates 50% passive loss, don't you still be left with $2M+ capital gain to be taxed?
How would you completely offset the massive capital gain?
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes4y
Quote from @Brian Kantor:
@Dave Foster and @Ronald Rohde, my parents are the only members of the LLC that owns the property. They each own 50%, so any move would be the two of them together.
@Jon Taylor, you are the second person who mentioned this. I did some digging already, and this seems like a more compelling solution than a syndicate for a few reasons:
1) This way they don't have to keep rolling over into a new syndicate every 5 to 7 years (or get the tax burden at that point)
2) The tax efficiency seems to be strong for them as they pass ownership to their heirs after they pass away
DST may be a good option, but the returns are more like a REIT, so it depends on what they're looking for. Also, the tax efficiency is the same as a syndication. The advantage would certainly be in not needing to roll over the funds, but that can be avoided by finding a syndicator that is consistently doing deals or holds long term.
Another option is to sell and then roll the gains into 3-5+ deals with a few sponsors and in a few areas. We very often have our investors do this. The tax write offs that we provide through cost segregation, then offset a large portion of their gains.
- Investor · Brooklyn, NY · Member since 2019 · 185 posts · 205 votes4y
Quote from @Lane Kawaoka:
I don't know why people do 1031s???
In 2018 I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.
The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).
Its a way of kicking the can down the road with taxes. I would use a 1031 in the last case resort since you have to pay taxes at some point unless you are going to take it to the grave with you and get the step up basis (so there is an exception if you are pretty sure you are on your last 5-10 years of life) which is not very practical due to the following.
1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.
2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2M for it to make it worth the administrative burden.@Lane Kawaoka Are you suggesting that if they sell their property for $500k and realize $200k in gains, but then take all $500k and invest that in a syndication, then in Year 1 that $500k shows as a loss, so that their net loss on the year is $500k - $200k = $300k loss on Year 1 tax returns?
- 4yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
Quote from @Daniel Han:
let's say you invest the entire $5M into syndication which generates 50% passive loss, don't you still be left with $2M+ capital gain to be taxed?
How would you completely offset the massive capital gain?
It certainly depends on the situation. You originally said the $5M was all gain, so presumably you would have some basis you could invest as well. Also, you can certainly get better than 50% passive loss on a syndication investment. My numbers were not exactly at $5M of gain but when I sold all of my multifamily investments I had significant capital gain and deferred all of that gain through what my accountant calls a "Lazy 1031" which is using passive losses from syndication investments to offset gains from active or passive real estate. Will it work perfectly in every situation - absolutely not, but it my mind it is easier and more manageable than a regular 1031.
- Investor · Member since 2019 · 74 posts · 70 votes4y
I was using Lane's example to see what would happen if there was huge capital gain, to begin with. I think your example and Lane's example make sense to do "lazy 1031". but I think it might not work for all cases.
As far as I can tell, there is no syndication investment that generates 100% passive loss. If the goal is to defer capital gain's tax, then there might be a threshold amount that might make sense to explore 1031 even though it might be a big hassle.
- 4yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Daniel Han, You also want to understand what kind of passive loss is being touted.
1. A passive loss resulting from operational activities is probably not a good thing no matter how it's spun.
2. A passive loss resulting from cost segregation and bonus depreciation can be a very good tool but..
a. depending on the characterization on your tax return and your income level you may not be able to access enough passive loss to offset your capital gain because that loss is still suspended in a current project. There's several ways this can happen. So have a face to face with your accountant before jumping into anything 1031 or syndication.
. b. Losses from applied "forced" depreciation are nice now. But they will come due when that property is sold. And at that point you have now lost your option to 1031 the gain from the old property, plus the gain from the new property, plus the added depreciation recapture.
. 1. A couple solutions to "b" above are if the syndicator can actually do a 1031 of their own (fine because the LP for the syndication is the taxpayer) and you roll with that into the next project. Not being done much yet because of timing finding larger properties that work, need for immediate cash flow, etc.
. 2. Or if you can quickly roll into a new syndication where you once again get bonus depreciation and passive losses (don't forget to make sure you can access these). Again it saves you for a while but when that next property sells you're once again in a bad tax position. With a regular 1031 you're a hostage to a govt process that's been a statute for 102 years to keep it going forever. With a "lazy 1031" you're hostage to an individual. Hoping they can keep the tax deferral going. For slowness and thoroughness and change resistance - my money's on the Guvmmnt!
. 2. Or combine the 1031 to maintain the preferred tax situation (I'm happy carrying deferred tax to my grave and making income off of it for my entire life :). But in your next 1031 exchanges allocate your proceeds so your replacement properties include some with maximum leverage (not a bad thing in this interest environment) and some properties that are free and clear. Using the 1031 you consolidated your cash equity while still deferring all tax. Then do a non taxable cash out refinance of the free and clear properties. Invest tax free money into the syndications and let your tenants pay the mortgage. A lot of investors are going this route and the DST route as they sense a market shift.
The 1031 Investor5137 Reviews - Investor · Member since 2019 · 74 posts · 70 votes4y
Quote from @Brian Kantor:
Quote from @Lane Kawaoka:
I don't know why people do 1031s???
In 2018 I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.
The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).
Its a way of kicking the can down the road with taxes. I would use a 1031 in the last case resort since you have to pay taxes at some point unless you are going to take it to the grave with you and get the step up basis (so there is an exception if you are pretty sure you are on your last 5-10 years of life) which is not very practical due to the following.
1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.
2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2M for it to make it worth the administrative burden.@Lane Kawaoka Are you suggesting that if they sell their property for $500k and realize $200k in gains, but then take all $500k and invest that in a syndication, then in Year 1 that $500k shows as a loss, so that their net loss on the year is $500k - $200k = $300k loss on Year 1 tax returns?
Depending on the type of investment, the forced depreciation is about 50-60% first year for MF syndication based on my experience. If you had $200k gain and re-invested the entire $500k a same year, then you will generate $250k passive loss. This loss will offset your $200k gain and the net $50k loss is on balance. This is what people refer to "lazy 1031".
However, as @Dave Foster mentioned, you will have to deal with depreciation recapture when the syndication property is sold. Depending on the syndication return target, you might have to keep investing other money (to generate more passive loss) to defer tax.
- 4yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
Quote from @Daniel Han:
Quote from @Brian Kantor:
Quote from @Lane Kawaoka:
I don't know why people do 1031s???
In 2018 I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.
The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).
Its a way of kicking the can down the road with taxes. I would use a 1031 in the last case resort since you have to pay taxes at some point unless you are going to take it to the grave with you and get the step up basis (so there is an exception if you are pretty sure you are on your last 5-10 years of life) which is not very practical due to the following.
1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.
2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2M for it to make it worth the administrative burden.@Lane Kawaoka Are you suggesting that if they sell their property for $500k and realize $200k in gains, but then take all $500k and invest that in a syndication, then in Year 1 that $500k shows as a loss, so that their net loss on the year is $500k - $200k = $300k loss on Year 1 tax returns?
Depending on the type of investment, the forced depreciation is about 50-60% first year for MF syndication based on my experience. If you had $200k gain and re-invested the entire $500k a same year, then you will generate $250k passive loss. This loss will offset your $200k gain and the net $50k loss is on balance. This is what people refer to "lazy 1031".
However, as @Dave Foster mentioned, you will have to deal with depreciation recapture when the syndication property is sold. Depending on the syndication return target, you might have to keep investing other money (to generate more passive loss) to defer tax.
I agree with what you are saying, however, I have invested in several MF syndications and gotten over 100% passive loss. I had Tom Wheelwright on my podcast and he mentioned that if a syndicator isn't getting over 75% passive loss, then they are doing something wrong. He also said that depreciation recapture is overblown because many of the items that are accelerated in a cost segregation could be fully depreciated by the time the asset sells.
I don't think there is a right way or a wrong way to defer taxes - it depends on the person and their particular situation. The Lazy 1031 worked for me and it is still working. I don't pay tax on my capital gains or distributions because all of it is offset by my passive losses. I am not a tax advisor or financial advisor, so I am only talking from my personal experience!
- 4yScott JensenPro MemberFinancial Advisor · Blaine, MN · Member since 2014 · 477 posts · 387 votes
Really good conversation here. I wanted to add that the huge depreciation benefit in year 1 is a result of the Tax Cuts and Jobs Act TCJA. The TCJA allows us to take the assets from the Cost Seg study (5, 7 and 15 year assets) and take all of the depreciation in year one as bonus depreciation. The strategy that is being described in this thread works wonderfully under the current tax law.
However, 100% bonus depreciation of these assets is scheduled to be phased out after this year. So, unless congress changes the tax law to make this permanent, this strategy will not be as effective in the future. Keep this in mind when you're doing your long term tax planning. Here's an article that describes the phase out. Bonus Depreciation: 5 Key Points
P.S. I have seen year 1 depreciation pretty close to 100% of the investment. It is generally due to a property being very highly leveraged.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes4y
Buying little rental properties are just not scalable.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes4y
Plus all the debt, liability, management responsibility of owning rentals are just not what high net worth individuals want.
- Los Angeles · Member since 2020 · 63 posts · 22 votes4y
Yeah you definitely can 1031 into a syndication, not all will allow it but I've definitely worked with a number of investors on things like this.
- Los Angeles · Member since 2020 · 63 posts · 22 votes4y
Yes you can, typically through a TIC.
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