Couple questions about passive MF investing

[Cherry Patterson]

Hello everyone,

I am going to invest in some syndications and i wanted to raise a couple questions here for advice.

1. my SFHs I have in LLCs. What are the advantages of putting the MF investment into a disregarded LLC vs in my private name?

2. Whatnare the disadvantages of putting a MF passive investment into a C Corp? This would allow me to deduct a lot of "general" expenses and shelter the income, however is this wise? I know with SFH it is problematic.

3.  Do people typically do 1031 exchanges with syndications or end up paying tax on the capital gains when exiting the deal?

4. Tom Wheelright advises not to own real estate in a SD IRA. What about owning shares in a passive real estate deal. Has anyone ran into tax issues on the SD IRA by participating in passive multi family deals?

Thank you in advance!

[Brian Burke]

@Cherry Patterson you have some great questions.

1. I cannot think of any advantages of putting your investment in an LLC. Most syndicated offerings are already structured as LLCs and as a member of the LLC your liability is already limited to the amount of your investment. One could argue that there are some tax savings because perhaps you could deduct some "general expenses" but I think the cost of establishing and maintaining an LLC might wash that benefit. Or perhaps not, but you'd have to study how much you have in general expenses and if it really would be deductible to decide whether there is any benefit. Most of our investors that invest in our offerings via LLCs do so because there are multiple members, such as in a family office or where a group of friends or family pool their resources to invest. They aren't doing it for tax or liability reasons.

2. I think this is a tax question best answered by tax experts.  I know that in my 30 years in this business I've heard over and over not to place appreciating real estate in C corps.  So I just don't do it--but I can't give advice on it.

3. Typically not.  Most syndicated offerings are not eligible for 1031 exchanges unless the entire group is exchanging out of one property and into another.  This is very rare--more often than not someone wants to enter or exit the investment, or the sponsor wants to get paid their promote so the 1031 can't happen.  There are some groups out there doing (or claim they can do) drop and swaps but to most sponsors that's just a tangled web of complexity so you don't see this very often.

4. We have tons of investors in our offerings using SDIRA money. There can be some tax issues with being subject to UBTI but comparing the after-tax performance of a syndicated offering versus other IRA-appropriate investments can make the syndication investment just as attractive if not more attractive than the alternatives. And after many years in this business and a lot of SDIRA investors, I've never heard any of them say that they wish that they hadn't invested their IRA money. But we have had plenty that have declined to invest in the first place due to UBTI--but they are just missing out!

Hope that helps.  Good luck!