1031 Exchange and a Syndication
On my calls with investors, I often get asked, “Can you do a 1031 Exchange (commonly referred to as just “1031”) with an apartment syndication with a group of investors?”
The apartment syndication structure does make it more challenging to do a 1031 exchange but it can certainly be done. There are things that have to be done when setting up the entity and a process to follow when you begin to ensure a smooth 1031 exchange.
Our group does plan to do a 1031 exchange on each asset when we sell and those investors that want to get out do have that option. We cannot guarantee that we will be able to complete the 1031 exchange as there is a certain timeline that must be followed for it to work properly according to the IRS guidelines.
When we sell an asset, the next property must be identified within 45 days of closing. We must then close on the new property within 180 days from closing in order to qualify.
There is also the potential that the IRS changes their guidelines which completely removes or makes the process more challenging for the 1031 exchange. I think the latter is more likely given the fact that it would cause a major impact on the real estate market if the 1031 exchange option was completely removed altogether. This could certainly occur when there is a change in the presidency.
The Legacy Wealth Play – Never Pay Real Estate Capital Gains Tax Again
One of the major benefits of doing the 1031 exchange is the ability to defer the capital gains tax and to avoid depreciation recapture. However, eventually you will pay the capital gains tax if you sell and take the proceeds out instead of opting for the 1031 exchange.
If you can continue to 1031 exchange until you die, the basis in the property will reset to the current value of the investment when you die as the investment is handed down to your heirs. This is why I like to call the 1031 exchange a “legacy wealth play” as this allows to you to never pay capital gains (or depreciation recapture) and to leave more to your family when you pass away.
Why does your group trouble yourself with doing the 1031 exchange for your investors?
One of our goals is to continue to have our passive investors invest with us deal after deal for many decades. We want our investors to be with us for the long haul and not just a one off investment.
All three of our managing partners, including myself, have our own money invested alongside our investors in each offering that we structure. We want to help grow our own wealth and have our investors grow alongside us so we can all enjoy the benefits of the legacy wealth building options that both 1031 exchange and apartment syndication provide.
Some groups choose not to do a 1031 exchange at the end of their deals because it takes more time, energy, and effort to complete the transaction. I am personally invested in 21 different passive syndications with 8 different operators myself and I do not want to invest with someone that is not in it for the long haul. Many of the processes that we have in place for our investors is due to the experiences that I have as a passive investor myself.