‘Can I do a 1031 exchange in a Regulation D syndication?’

Hi, this is Tilden Moschetti of Moschetti Syndication Law Group. Today we have a question about 1031 exchanges and syndication. Can the two go together both going into a syndication and coming out of the syndication using a 1031? Exchange? The question I occasionally hear about putting together a syndication as a syndication lawyer is, Can I do a 1031 exchange as a syndicator? Now, there's obviously two different questions going on at the same time first, can I get investors who wanted 1031 Exchange into my syndication? The answer is yes, but it is a little complicated. Now, it's complicated because a 1031 exchange really exists in a tax world. And it exists in a title world title to the property world. And a syndication exists more in the syndication world or a business entity in a securities world. So putting the two together is a little bit more challenging. So the answer is, yes, you can do it, but here's how it has to happen. So the PERT, the investor that you want to come into your syndication, would basically be doing a 1031 exchange into a subset of that property as a 1031 exchange. So they would come into it as a tenant in common. And then what would exist is on title is that tenant in common structure, and then also your, your syndication, also as a tenant in common. So, the challenge with tenant and Commons is that each tenant in common structure gets to vote on what happens with the property, not necessarily in a complete marketing sense, like exists in that they actually have that control. But practically, they do, for example, a 1031, person of 1031 investor, who comes into your property and has that that tenant in common. While you may want to sell the property at a at any specific point, like the exit is time, that other person who came in and has that tenant in common structure may not want to sell. And it's going to be very challenging to force that tenant in common to sell their interest, because it's up to the each tenant in common to make the determination on when they're going to sell. So there is an inherent challenge and a risk to the entire syndication structure. Because from a practical point of view, while you could sell your tenant and common interest and leave that other guy in existence, it's not very practical that you'll be able to sell that little swatch. It also was challenging on getting financing on a property, because that tenant in common the with with the investor will need to come along and sign all the loan docs along with you as well. So that's the real challenge of them coming in? The answer is yes, you can have investors come in as tenant in common through a 1031 exchange, but it is pretty challenging. So our recommendation is make sure that thresholds pretty high, you don't want them to just be using a 1031 exchange in order to place 4005 $1,000 The amount of headache that you're going to have is not worth it. If they're investing a million dollars worth of value, it might be worthwhile to have that discussion. So the second question really is can the Can my syndication itself, we're putting the the issue of the 1031 exchange into it aside, and we're assuming that you just have the syndication itself as the is the LLC that has titled to the property? Can that syndication, do a 1031 exchange out of the property? The answer there too is yes. But so if everybody wants to come along for the ride, and they want to and you want to do a 1031 exchange from one property to another property, both of them are investment and it meets All of the other criteria of 1031 exchanges, because it's a single entity doing it, it's pretty straightforward how to do it, and that your regular Accommodator can take care of it and make sure that it happens correctly. The time where we say, but maybe maybe not, is in the case of you don't want how you want to make that 1031 Exchange, but some of your investors one out, and the rest of them want to go along with that exchange. Now, here's the challenge. From an IRS point of view, there isn't really a challenge. But if this if the property happens to be located in a state, where the Franchise Tax Board or whatever the taxing authority is, is not as willing to go along with the program, you're going to have problems. For example, if you were to try and do this in California, the Franchise Tax Board there is very, very aggressive when it comes to collecting taxes on 1031 exchanges, they want their money back as quickly as possible. So the Franchise Tax Board in California is likely to file a claim and file a lawsuit against your syndication saying that was not a valid 1031 exchange because you had investors who got paid out earlier. And even if the taxes for them have gotten paid, the new ones will not be able to go along, the new ones will not go along and you'll have a lawsuit taking place underneath the syndication. If all of your investors are from a state that is more accepting of this and are and there are some that wish to stay outside of don't want to participate in the 1031 exchange, then you're not going to have that issue, because the IRS is position has generally been that it is okay to 1031 Exchange out because that's what the rule that would make sense is because it's a single entity still doing it. It doesn't matter if it's a partnership interest from tax point of view, or anything like that. So I hope that helps. My name is Tilden Moschetti. I am the founder of Moschetti syndication Law Group. We do private placement, memorandums, operating agreements, really everything you need in order to be in compliance with the SEC under Regulation D. If you need any help, feel free to give us a call and we can help you with your syndication project.