1031 Crowdfunding Review: 1031 Investment Exchange Options
October 14, 2022
1031 crowdfunding is a platform that purchases real estate eligible for 1031 exchanges. It makes the process easier for real estate investors who want to dispose of their current properties but don't want to pay taxes on their capital gains yet.
What Is 1031 Crowdfunding?
1031 crowdfunding is a platform for real estate investors to exchange real estate properties in the securities industry. Rather than crowdfunding new money, real estate investors use their real estate funds from selling a property to buy like investments in a 1031 exchange.
The properties on the 1031 crowdfunding platform are already purchased and vetted as legal 1031 properties. Therefore, you can use your funds from selling current investment properties to invest in 1031 investments and defer your tax liabilities.
Pros of 1031 Crowdfunding
- Tax benefits resulting from the real estate investments you crowdfund.
- It can be a long-term, safe investment.
- The due diligence is done for you.
Cons of 1031 Crowdfunding
- There can be a lot of hidden fees.
- Only an accredited investor can invest.
- The legal structure is complicated.
How Does 1031 Crowdfunding Work?
The properties on 1031 crowdfunding are a part of the Delaware Statutory Trusts. All properties are turnkey. This means they are ready for immediate purchase to satisfy the 45-day IRS window to use funds from the sale of an investment property to avoid taxes. Many investors can close in a few days, reducing the risk of missing the IRS window required to crowdfund.
You can use your 1031 exchange funds to invest in one or multiple 1031 properties across the platform. If your portfolio consists of multiple properties, you reduce the risk of a total loss should one property fail. In addition, this allows you to diversify your investments and put the days of operating as a landlord behind you.
Most deals offered are in Delaware Statutory Trusts and have already been through legal due diligence to give investors peace of mind. Before you invest, however, you should always get legal or tax advice from your own professionals or management team to ensure the investment is a good risk.
Is Investing in 1031 Crowdfunding Legal?
1031 crowdfunding investing is legal, but you must be an accredited investor. They are offered as 506B and 506C deals.
506B deals are hidden until the platform verifies your status as an accredited investor. However, 506C deals aren't hidden, but you cannot invest in them until you're verified as an accredited investor.
Types of Investments 1031 Crowdfunding Offers
The 1031 crowdfunding platform offers real estate investments, but only for 1031 exchange investment options, not properties for sale. The like-kind exchange isn't a sale but a reuse of the funds earned from selling an original property.
Rather than paying capital gains taxes, investors put the money in another real estate investment. Real estate investors can use the funds to buy one property or several, as long as it's a similar investment.
How Does 1031 Crowdfunding Generate Revenue?
The 1031 crowdfunding platform makes money by charging a 5% - 7% fee on each transaction. This is common for tax-deferred investments. However, the fees might put off real estate investors used to buying properties without paying any commissions.
What Do You Gain When You Invest With 1031 Crowdfunding?
When you invest in 1031 investments, you avoid capital gains taxes on the proceeds of the sale. The taxes can be as much as 30% of your profits, leaving you with much less money in hand than if you exchanged the funds in a like-kind exchange.
With 1031 crowdfunding investing, you don't have to do the due diligence or deal with the stress of finding eligible 1031 properties. The IRS timeline and requirements can be stressful, making it hard to meet the deadlines, but the crowdfunding platform helps alleviate the stress. In addition, if your portfolio consists of enough properties to use up the funds from selling your like-kind exchange properties, you'll defer the taxes owed.
Potential Returns and Cash Flows From Crowdfunding Investments
Crowdfunding investments have longer terms than traditional real estate investments. For example, most like-kind exchanges on the 1031 crowdfunding platform have a holding period of 7 - 10 years and have an average return of 5 to 7 percent.
What Does a Deal With 1031 Crowdfunding Look Like?
Each crowdfunding deal looks different, but here is a quick rundown of what you can expect.
- Find the right asset management class and investment strategy that aligns with your portfolio.
- Look for sponsors with the level of experience you're comfortable accepting.
- Assess the property's loan-to-value ratio and compare it to what you consider worth it.
- Determine the sponsor's investment, how much skin in the game does he have, and does it match your risk?
- Evaluate the fees, making sure to read the fine print.
- Determine the future rents predicted and how they compare to the market average.
1031 Crowdfunding Competitors
1031 crowdfunding is a unique investment option, but there are alternatives and competitors to consider.
CrowdStreet offers investors a way to invest in commercial real estate without owning the properties themselves. The website is easy to use, but it requires a high minimum investment of $25,000, and like 1031 investments, it is only available to accredited investors.
Roofstock is another turnkey property marketplace geared toward real estate investors. It streamlines the process of purchasing residential investment properties that already have tenants in them. As a result, you become an instant landlord when you buy the properties, earning rental income immediately. In addition, you do not have to be an accredited investor to invest in Roofstock.
RealtyMogul is another crowdfunding platform that allows investors to buy small shares of commercial real estate property. The platform has two opportunities for non-accredited investors to invest in non-traded REITs or multiple investment opportunities for accredited investors.
1031 Crowdfunding Investment Platform FAQs
Still interested in learning more about 1031 crowdfunding? Check out these questions from people like you!
Is Real Estate Crowdfunding a Good Idea?
Real estate crowdsourcing or crowdfunding can be a great way to start investing in real estate. In addition, crowdfunding can be a good alternative if you don't have enough capital to buy commercial properties or don't want the pressure of acting as a landlord.
What Are 1031 Funds?
1031 exchange funds are money invested in a commercial real estate property that you sell and use to buy a like-kind property or invest in 1031 crowdfunding. The funds aren't taxed if you invest them within the IRS timeframe into another qualified real estate investment.
What Are the Disadvantages of a 1031 Exchange?
Deferring taxes on capital gains can feel like a big win, but there are some downsides. First, you don't get access to the capital because you must immediately roll it into a new investment. Second, the entire process is complicated and requires legal and tax advice from professionals.
Can I 1031 Into Crowdfunding?
If your current portfolio consists of commercial real estate properties that qualify for the 1031 exchange, you can 1031 into crowdfunding. This means you sell your existing properties and use the 1031 exchange funds to invest on the 1031 crowdfunding platform. You must have funds from a 1031 exchange to be eligible to crowdfund.
Can You 1031 Exchange Into Fundrise?
No, you cannot use 1031 funds to invest in Fundrise. If you use the funds to invest in Fundrise, you'll owe taxes on the capital gains from selling the properties.
Can You 1031 Into a Real Estate Fund?
It might be possible to 1031 into real estate funds; however, it's a complicated process. Therefore, getting legal or tax advice is important before choosing this route.
Can You 1031 Into CrowdStreet?
No, you cannot 1031 into CrowdStreet at this time. This is because they don't consider it a like-kind exchange, and you would pay taxes on the proceeds of the sale.
What Is a Reverse Exchange?
In a reverse exchange, property owners buy the replacement property before they've disposed of the original property. This makes it possible to satisfy the IRS rules without the stress of being able to find a property in time.
What Is the Purpose of a Delaware Statutory Trust?
The Delaware Statutory Trust is a separate legal entity holding commercial property titles. The trust can hold one or multiple commercial properties. Accordingly, each investor of the trust has a beneficial interest.
Do Banks Do 1031 Exchange?
Some banks, like Wells Fargo, offer 1031 exchange services; however, it's not a common bank service.
Crowdfunding Property Investment - The Bottom Line
The 1031 crowdfunding platform is unique in its offering and wealth accumulation, making it easier for 1031 investors to satisfy IRS requirements. Of course, it's still a complicated process, and you must be an accredited investor to use the service, but it can be a good way to dispose of a property you no longer want to manage but want to remain invested in real estate. Learn more by signing up and visiting our blog.
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