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Real Estate Crowdfunding: Taxable or Non-Taxable Account?

Started by shreddah, August 19, 2018, 07:30:53 AM

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For those of you that have opened a real estate crowdfunding account, did you open one with a taxable or non-taxable (IRA) account?

Taxable
8 (61.5%)
IRA
5 (38.5%)
Other
0 (0%)

Total Members Voted: 13

shreddah

For those of you that have opened a real estate crowdfunding account, did you open one with a taxable or non-taxable (ie. IRA) account?  I was wondering if dealing with the K1s would be easier in a non-taxable account. 

Cheers!

Sam

I opened my RealtyShares account in a taxable account. But I think it's much better to open one in a IRA if you can. No tax filings to deal with and it's nice and easy to hold the crowdfunding investments long term.

That said, it was easier to file a K-1 for each investment than expected.

Sam
Regards,

Sam

shreddah

Thanks Sam.  I have an old Roth IRA that is worth about $100k, seems like that would be a good account to build a starter position with one of the Realty Shares.  Do they have a minimum you have to meet in order to invest in their funds?

Sam

Regards,

Sam

Personal Finance Guy

Does anyone know if investments made on a RE crowdfunding site typically pass through depreciation to the investors? If they are equity investments, I'd assume you would want to hold this in a taxable account so you can fully take advantage of the tax benefits of investing in real estate. I've always attempted to have real estate exposure be taxable because the asset class is so fundamentally tax friendly. You also have to be aware of the potential to trip UBTI if the investment is made via a tax advantaged account and the real estate is leveraged; that can get really complicated.

Curious to hear from others as to whether or not the typical tax advantages of holding real estate (most commonly that cash flow is almost always tax sheltered/deferred because of depreciation) apply to crowdfunding investments. If so, I'd hold in a taxable account.

Sam

Quote from: Personal Finance Guy on September 09, 2018, 05:49:05 PM
Does anyone know if investments made on a RE crowdfunding site typically pass through depreciation to the investors? If they are equity investments, I'd assume you would want to hold this in a taxable account so you can fully take advantage of the tax benefits of investing in real estate. I've always attempted to have real estate exposure be taxable because the asset class is so fundamentally tax friendly. You also have to be aware of the potential to trip UBTI if the investment is made via a tax advantaged account and the real estate is leveraged; that can get really complicated.

Curious to hear from others as to whether or not the typical tax advantages of holding real estate (most commonly that cash flow is almost always tax sheltered/deferred because of depreciation) apply to crowdfunding investments. If so, I'd hold in a taxable account.

I don't think you get the same tax treatment if you are a REC investor. The income you get is treated as K-1 income.
Regards,

Sam

Rman82

One thing to keep in mind if investing via an IRA is the fees.  If investing minimal amounts ($5,000 or $10,000), IRA fees may become a significant factor.  I try to invest a minimum of $25,000 per real estate transaction.

dj2020

Quote from: Sam on September 09, 2018, 09:59:16 PM
Quote from: Personal Finance Guy on September 09, 2018, 05:49:05 PM
Does anyone know if investments made on a RE crowdfunding site typically pass through depreciation to the investors? If they are equity investments, I'd assume you would want to hold this in a taxable account so you can fully take advantage of the tax benefits of investing in real estate. I've always attempted to have real estate exposure be taxable because the asset class is so fundamentally tax friendly. You also have to be aware of the potential to trip UBTI if the investment is made via a tax advantaged account and the real estate is leveraged; that can get really complicated.

Curious to hear from others as to whether or not the typical tax advantages of holding real estate (most commonly that cash flow is almost always tax sheltered/deferred because of depreciation) apply to crowdfunding investments. If so, I'd hold in a taxable account.

I don't think you get the same tax treatment if you are a REC investor. The income you get is treated as K-1 income.



I'm also trying to figure this out.  I signed up for RealtyShares and Fundrise tonight but unsure if I should be investing directly in these platforms (taxable) or in a self-directed IRA.

The Fundrise "Long Term Growth Plan" consists of various eREITS and eFunds that provide K1 and 1099-DIV tax documents come tax time. If it was only 1099-DIV income, I think I would definitely invest with a sdIRA. But the K1 concerns me as I don't want to trigger UBTI. All of these investments involve leverage.

On my "onboarding" phone call with a RealtyShares rep this afternoon, he said all their offerings are equity deals that provide K1's, therefore should just invest directly on the platform and not via a sdIRA.

What's everyone's thinking and experience here?


dj2020

Just got a reply to my question above from a Fundrise rep.  It doesn't really address my concerns and basically says ask your CPA.

Thank you for reaching out.

Most investors on our platform will receive a 1099-DIV and/or K-1, depending on their investments. Investors in each eREIT will receive a 1099-DIV at the end of each year. Investors in an eFund will receive a K-1, K-1 information, or substitute K-1, which will reflect their annual share of the eFund's taxable income or losses.

While earlier iterations of the starter portfolio and advanced plans did include exposure to the eFunds, currently these plans are spread only across the Fundrise eREITs, though these underlying allocations are subject to change.

We intend to upload these various tax documents to the Documents tab of each investor's dashboard in advance of each tax season.

For additional high-level tax related information, please feel free to see the resources here and here. For any tax information specific to you, please consult your CPA or tax professional.

Please let us know if you have any further questions.


I still believe eREITS that generate 1099-DIV would be better suited for an IRA tax-efficiency wise. I'm not too sure if a K-1 is generated come tax time though.


Fat Tony

Advice: If you do have assets in a (Roth) IRA and want to invest in Fundrise, strongly consider doing so via IRA.

I created a taxable account but after getting my 1099-DIVs, I've strongly convinced that I really should have moved my Roth IRA funds there instead. The tax difference is huge: On an eREIT yielding 8% as a nonqualified dividend, it's easy to give up nearly half of your yield to taxes at high brackets (35% Fed+3.8% NIIT+9.3% CA)=3.85% in taxes for only a 4.15% effective return, vs. say a stock ETF returning 2% qualified dividends (15% Fed+3.8% NIIT+9.3% CA)=0.56% in taxes, and the other 6% capital gains deferred.

REITs, especially high-yielding ones, are truly some of the least tax-efficient assets. Examples are at 210K AGI single. At 110K AGI single, you're still giving up 2.66% on the REIT and only 0.49% on the stock ETF to taxes. The main issue is that you're paying dividend taxes annually rather than compounding tax-free.

I can confirm that the eREITs don't give you a K-1, as I had a full tax year (2017) with only eREITs and only got 1099-DIVs. The eFunds seem to potentially give you K-1's as well.

At the time, I was still testing the waters with Fundrise, and I wasn't sure if they would let me do backdoor Roths every year (open a trad IRA, fund that with $5.5-6K, convert to Roth IRA). However, I do have a Roth IRA (currently holding stock ETFs) that I could sell and move to the Fundrise self-directed IRA.

However, if I want to make a new Fundrise IRA account, it looks like I lose the ability to choose my specific eREIT investments, being forced into a "blended fund" model, which I dislike - I want to pick the particular fund so I can get Heartland exposure, out of my home territory, and there are many eFunds that are still in the "ramp up phase", where they stick your money in there with 0% yield (that actually really annoyed me). Finally, unless I want to overweight myself in REITs, I will have to early-withdraw my taxable account and incur a 3% fee. Going to call them and see if there's anything they can offer to make the situation more manageable.