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  • Ed Fernandez, 1031 Crowdfunding, LLC

How Crowdfunding is changing the 1031 space

Stick around the Commercial Real Estate industry long enough, and you will have the pleasure of dealing with a 1031 exchange. Tight deadlines, confusing identification rules, and all too typical closing troubles leave many with a general feeling of dread regarding the whole process. One false step, and the IRS is ready to pounce with a potentially devastating tax bill. It is no wonder that many who wish to sell their property refuse to accept decent offers simply because they do not yet have a viable replacement lined up. While this response is both understandable and prudent, it can be particularly frustrating to buyers and real estate agents alike.

The good news is there are viable options. Two major developments are re-shaping the 1031 exchange landscape. The first is Title II of the JOBS Act which came into effect in September 2013. Until then, companies were not allowed to advertise or sell securities over the internet to persons without having a pre-existing relationship. This is drastically changing the way private companies raise capital, and it is changing the way 1031 exchangers find replacement property.

The second major development is the Delaware Statutory Trust (DST). This trust structure allows investors to purchase a beneficial interest in a larger, institutional-grade property. These assets can be difficult for average real estate investors to purchase on their own but are generally a more stable investment.In the aftermath of the Great Recession, DSTs supplanted the Tenant-in-Common (TIC) structure as a more disciplined investment vehicle. Investors and real estate sponsors were eager to find an alternative which fixed the draw backs associated with TICs. To satisfy exchange requirements and investor protection concerns, DSTs have a strict list of “7 Deadly Sins” by which every DST sponsor must adhere. These strict rules also have a myriad of other benefits: the security of professional management, no requirement to be signatory on the debt or sign on any carve-outs, limiting personal liability, and rent proceeds that are distributed, hassle free, as 1099 income. Additionally as a 1031 exchanger, a DST can act as a type of exchange insurance (given the offering hasn’t sold out).

A DST investment can close quickly, typically 2-3 business days, and can easily fit into any property ID strategy. Saying that the 45-Day ID Period can be hectic is a serious understatement; we often see exchangers who come to us with only days left in their 45-day ID Period after all of their previously identified properties have fallen through. These exchangers are the lucky ones because it’s not too late to save their exchange by identifying a DST. Those exchangers who did not include a DST in their property ID line-up, often find themselves with no options but to pay taxes if any troubles crop up during due-diligence or if the property falls out of escrow for any number of reasons.With such major developments improving the 1031 space, this is an exciting time to be an innovator.

Seeing an opportunity to improve a frustrating process, our experienced team at 1031 Crowdfunding has created a turn-key alternative solution to the traditional 1031 exchange. Through our friendly representatives and proprietary crowdfunding platform, we make it possible for exchangers to browse DSTs at their convenience, process paperwork electronically, and acquire replacement property that successfully and effortlessly completes their 1031 exchange. or toll free at (844) 533-1031.

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