How To Bring Funds From a 1031 Exchange Sale Into An Apartment Syndication
- What Is a 1031 exchange?
- Can I 1031 my profits from a syndication into the next deal?
- How do I bring funds from a 1031 exchange sale into a syndication?
- Executing a 1031 exchange
- What are the costs involved?
- Timeline to successfully execute a 1031 exchange
Download our Free 1031 Exchange Guide!
Everything you need to know about How to 1031 Into an Apartment Syndication
What Is a
1031 Exchange?
A 1031 exchange is a process through which one can sell an investment property and buy another while deferring capital gains tax. Typically, when one sells an investment for profit, they have to pay capital gains tax. Real estate is no different.
However, section 1031 of the tax code allows for an exception that when followed, permits that capital gains tax to be deferred. It’s a great benefit that sounds easy, but of course, there are rules
Can I 1031 my profits from a Syndication into the next deal?
The quick answer is YES and it is standard practice for Invest on Main Street.
- If you invest directly into the syndication (regardless of your investment size), the sponsor can decide to do a 1031 exchange into a succeeding property upon sale, but the individual investors cannot exchange their interest for something else.
- To do this, all members need to travel together to the next property or their interest will need to be bought out by the GP prior to sale. Although this is standard practice for Invest on Main Street’s deals and is highly advantageous for the limited partners, this process, along with lining up the next property, can be complex for GP sponsors to facilitate and therefore, it is not commonly done.
- Oftentimes, the GP will take the opportunity at sales to cash out their proceeds. If this is something you want from your syndicators, you need to inquire in advance with your sponsors to verify that they intend to 1013 forward and inquire about their experience with doing so successfully. For more information on How to 1031 into an Apartment Syndication, Download our 1031 Exchange Guide. If you have any questions, Schedule a Free 1031 Consultation today
How do I bring funds from a 1031 Exchange sale into a Syndication?
- So can I invest in multifamily syndication using a 1031 exchange? The answer is YES!
- It is done through creating a structure called Tenants in Common…aka TIC (No, not the bug!).
- This structure sits adjacent to the syndication on the property org chart so it is not technically part of the syndication. You are essentially joint venturing with the syndication as a partner.
- At Invest on Main Street, we have experience structuring TIC 1031 exchanges in our syndications, but due to the complexity and added legal costs, we require 1031 investors to invest a minimum of $500,000. The greatest source of complexity comes from the lender requirements when it comes to the TIC structure, especially Fannie Mae and Freddie Mac. Download our 1031 Exchange Guide to learn more. If you have any questions, Schedule a Free 1031 Consultation today
Executing a 1031 Exchange
- Assume that a taxpayer has decided to invest in multifamily property and he has decided to sell it. To the taxpayer’s surprise, the property generated $300,000 in gains, and after closing, the net proceeds were $300,000. With the taxpayer staring at a capital gain tax liability of $200,000 in taxes (federal capital gain tax, depreciation recapture, state capital gain tax, and net investment income tax) after the property sells. Only $100,000 in net equity is available to be reinvested into another property.
- If the same investor chose to complete an exchange, he would have had to have identified the new replacement property, multifamily, within 45 days and invested the entire $300,000 into the purchase of the replacing property with no capital gains due
- For an investor, a 1031 exchange is an excellent opportunity. When you decide to invest in properties, it is natural to migrate to larger units, specifically multifamily properties
- As you continue development and growth in this area, you may even want to consider becoming an apartment syndication investor. This will allow you to pool resources from other sources that will facilitate the overall growth of your portfolio and investment profile. Understanding the 1031 exchange can generate large revenue and save taxes. Download our 1031 Exchange Guide to learn more. If you have any questions, Schedule a Free 1031 Consultation today
What are the costs involved?
In addition to the paperwork required to execute 1031, there are specific costs associated with doing so into syndication. When investor exchanges at/above $1,000,000 into syndication, these costs are often covered by the investment.
- The attorney will charge additional fees in order to set up the additional entities and the TIC structure
- The lender will sometimes charge a small underwriting fee for additional time needed to underwrite the additional TIC co-owner.
- The accounting team for the property sometimes charges an additional fee to prepare tax returns for the additional 1031 TIC co-owner. Download our 1031 Exchange Guide to learn more. If you have any questions, Schedule a Free 1031 Consultation today
Timeline to Successfully Execute a 1031 Exchange
Under the 1031 exchange code, the taxpayer has a 45-day window from the date of the sale of the previously owned property to identify the replacement property. The 45-day window is commonly referred to as an identification period. This process must be done in writing with the authentic signature of the taxpayer.
Download our Free 1031 Exchange Guide!
Everything you need to know about How to 1031 Into an Apartment Syndication
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