Guides

Real Estate Crowdfunding Explained

Real estate crowdfunding generally refers to online platforms that let a larger pool of investors, sometimes including non-accredited investors depending on the offering type, contribute relatively small amounts of capital toward a real estate deal or a diversified fund of deals. Most crowdfunding platforms generally operate under specific securities exemptions, including Regulation D for private placements limited to accredited investors, Regulation A+ for offerings open more broadly but subject to additional disclosure requirements, and Regulation Crowdfunding, sometimes called Reg CF, for smaller raises open to the general public with statutory investment limits based on income and net worth. In nearly all of these structures, investors generally purchase shares or membership interests in a fund entity, frequently an LLC or a non-traded REIT the platform sponsors, and that fund entity is generally the party that actually holds title to the underlying real estate. Because the investor's direct legal relationship is with the fund entity rather than with the real property itself, the resulting interest is generally treated as a security representing an ownership stake in a company, not a direct or fractional deeded interest in real estate. This structural reality generally means most real estate crowdfunding investments do not qualify as like-kind property for a Section 1031 exchange, regardless of how the platform describes the investment in its marketing materials, since Section 1031 generally requires the replacement property to be an interest in real property itself, and partnership, LLC membership, or REIT share interests are generally excluded from that definition. San Diego, CA investors coming out of a 1031 exchange sometimes discover a crowdfunding platform only after already committing to defer gain, and are disappointed to learn the platform's offerings cannot receive that exchange capital without triggering recognition of the deferred gain. A smaller number of platforms have begun offering DST-structured deals alongside their standard equity crowdfunding products specifically to serve the 1031 exchange market, and these DST offerings, when properly structured under Revenue Ruling 2004-86, can generally preserve exchange eligibility even though they may be marketed through a similar online interface to the platform's non-exchange-eligible equity products. Investors should generally confirm the specific legal structure, not just the platform name, before assuming any crowdfunding investment will work with 1031 proceeds. Because crowdfunding offerings, including any DST product offered through a crowdfunding platform, are generally securities, we do not sell securities and only provide introductions to licensed providers. Educational content only. This is not tax, legal, or investment advice.