How to 1031 into a Syndication?

Updated: Jul 4, 2020

You can 1031 into a syndication! Learn how we accomplish this challenge today on the Passive Cash Flow Show! The Passive Cash Flow Podcast is for beginner or experienced investors. Learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow! Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA's and 401K's are accepted. -- #NJRealEstateInvesting #AaronFragnito #PassiveCashFlow #PCG


Aaron Fragnito: All right. Ladies and gentlemen, welcome back to the Passive Cash Flow Show. This is episode number 17. We're going to talk today about how to 1031 into a syndicate. We're going to focus on a lot of investors who come to me, they say I have a building. I want to sell the building. I want to avoid capital gains tax, and I want to trade into a building with you where I don't have to do the work, and I don't have to personally guarantee the mortgage, or find the opportunity. I want a nice passive cash flow check in the mail. I want my tax benefits, and I want a big sum upon refinance. That sounds good. We try to do that for our investors all the time but 1031 complicate things. A 1031 tax deference when you sell a property and you trade into a bigger property, or a similar like size property of a similar kind, you have about 90 days to pick the property, and about 180 days to close on it after you select the property. It's a bit of a juggling act to do a 1031. You have to use a third-party 1031 company that's going to hold the funds from the sale. If you own a million-dollar building, you sell it for a million dollars, and you owe, say, half a million dollar on the mortgage, you're going to have half a million dollars from the sale. Now that can all be profit, and that's fine. The whole idea is to avoid capital gains on that profit. So you would hire a 1031 tax deference company, put it with the 1031 tax deference company, have 90 days to select a similar or like property, ideally a bigger property, and then have 180 days to close on that property. The money has to stay with the third party while you're selecting and closing on the property, and then the money is used to, of course, close on the property. Now the complication comes in with, well, Aaron, why don't we just start an LLC, and we'll add you, you and Seth as members. Investor will own 70%, Seth and I will own 30%. We'll do our magic. We'll reposition the building and work to get them past the cash flow checks. The problem is, if IRS finds out about that, basically it's skirting the rules. It's against the rules. When you do a 1031, you can't just add people to the LLC, or take people off the LLC, because they're going to get hit with taxes. It's going to disqualify the property from qualifying as a 1031. Basically, it's a big challenge to 1031 the property into a syndicate. You can 1031 the property into an LLC you already own, but you can't add people or take people off the company, the LLC, as you 1031 into a bigger building. It does complicate things for other investors that want to exit an investment, or investors that want to bring in operators like Seth and I to make the next building an easier opportunity for them so they don't have to manage it and deal with the headaches, and ideally make better cash flow because we're professionals and very experienced to what we do here. Actually there's two solutions to how to 1031 your property into a syndicate. Syndicate is a passive investment that it pulls capital together, and is operated by a general partner. One or two general partners generally. In this case, Seth and I are the general partners. We operate the syndicate in the passive investors, the limited partners bring in the capital. Normally, we just structure an LLC, and the investors get their share, and that's a nice clean way to structure syndication. In this case, we can't do that if you're 1031-ing into a property. You can't just add Seth and I to the LLC, or add five other investors that bring in money. That would break the rules of the 1031, and cause it to not qualify properly for that, and then the owner would have to pay taxes on the gains. The whole idea is to avoid those taxes, which can be huge in a real estate sale, especially over time with commercial real estate. I think the best solution is a Delaware statutory trust, also known as a Delaware State Trust. We'll call that a DST. Delaware State Trust here, that is simply a state trust that can have operators in it, general partners, and people who are passive as well, but it's pretty in depth here. It's an unincorporated association recognizing entity separate from its owners. It's formed by executing a Delaware State Trust agreement, and filing a certificate of trust with the Delaware Department of State, and Development Division of Corporations. Basically, DSTs are an alternative group of investments structure that includes trustees and management, like Seth and I, and beneficiaries, investors. The individuals selling their properties using a 1031 tax deference and trading into a Delaware State Trust that ideally, Seth and I would create. Let's say we had three or four investors, or even one big investor doing a 1031 tax deference, they can become other investors, beneficiaries in this trust. Seth and I would be the trustees. The management and the investors would be the beneficiaries. Now, if you're doing multiple investors, multiple 1031, that would be a bit of a juggling act, because they would have to sell their properties right around the same time, and have that capital available to put into the state trust right around the same time, and we'd have 90 days to identify the property, 180 days to close on it. As long as everyone sold their properties around the same time, we're able to move the capital properly into the trust, then it could be done. Then that's something we're actually lining up possibly for 2020 or 2021 here, because we have a lot of investors, about four or five investors right now that really want to do a 1031. They have a nice piece of real estate, they own a lot of equity in it, and if they sell the building, they're going to get hit pretty hard on taxes. By creating this Delaware State Trust, we create an avenue for these investors who have done their job well. They bought real estate. They created equity in it. Maybe they managed it well. Maybe they bought in the right area. Maybe they're a little bit of both, and over time, now they have a lot of equity. They want to harvest that equity and move into a bigger building but not deal with