The more investments you own, the more complex it can be to file taxes. It’s important to know what tax documents for real estate crowdfunding you should expect.
Real estate crowdfunding (REC) is a relatively new asset class since the passage of the JOBS Act in 2012. But not to worry. Real estate crowdfunding is just like any other private investment in partnership form.
Tax Documents For Real Estate Crowdfunding
Let’s explore the specific tax documents for real estate crowdfunding most investors receive. For each real estate crowdfunding investment you will likely get a K-1.
K1 Tax Documents For Real Estate Crowdfunding
A K-1 is a tax form distributed by many partnerships, S-Corps, estates, and trusts. If you are a general or limited partner of a partnership, a shareholder in an S-Corp, or the beneficiary of an estate or trust, you’re likely to receive a K-1.
A K-1 is just like any other tax form that you receive from an investment company, bank or employer. The information reported is different. But, you use the information provided on the form to accurately complete your tax return.
Expect To File A Tax Extension
However, K-1s are often distributed much later in the year than other tax forms. Therefore, filing a tax extension is generally necessary, especially if you have other private investments other than real estate crowdfunding.
In 2017, I invested $500,000 in a REC Domestic Equity Fund. This particular fund invested in 17 different equity deals around the country.
One of my worries was that I would get a K-1 for each invest. What a pain! But I was assured before investing that I would receive one consolidated K-1 instead. I had my doubts, but I’m pleased to say that receiving one K-1 was indeed the case.
As you can see from the image, I got a total of two K-1s. My initial investment was a $10,000 investment in a Conshy, Pennsylvania commercial property deal to test the waters. I found the platform to be intuitive, and the investment process to be straightforward.
Benefits Of Real Estate Crowdfunding
I wanted to minimize the amount of time I spent analyzing investments. As a result, I decided to invest in a REC fund. They could invest for me at a cost of 0.8%. The minimum to invest was $250,000. I had $1.8 million to reinvest at the time after I sold my San Francisco rental property for $2,740,000. This was equal to 30X annual gross rent.
I’m a big believer in investing in the heartland of America through real estate crowdfunding. Heartland real estate is much cheaper and the net rental yields are much higher.
The new tax policy limits the State and Local Tax (SALT) deduction cap to $10,000. In addition it limits the mortgage interest deduction cap to $750,000. This will hurt expensive coastal city real estate at the margin. In addition, this will squeeze high-tax states like California, New York, New Jersey and Connecticut the most.
Real Estate Trends
I also predict that over the next 10 years Red state real estate will outperform Blue states. The reason is due to economic and demographic trends:
- There will be a net migration out of Blue states into Red states. More people will realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price. We saw this happen in mass during and after the pandemic.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- The rise of real estate crowdsourcing platforms increases the supply of capital. Thereby this increases the demand and prices of previously hard to tap investments in Red states.
The Power Of REC And Diversification
My $500,000 investment could conceivably generate $75,000 a year. Or $15,000 MORE than what I was earning in net rent with a $2,740,000 property. This is the power of real estate crowdfunding and diversification. My goal has been to always generate as much passive income as possible. I want my wife and I never to have to go back to work again.
In 2018, I invested another $300,000 in real estate crowdfunding for a total of $810,000. I’m glad I did because the stock market has been rocky. And the real estate market has softened in expensive coastal city markets like NYC and SF.
The great opportunity in my mind is Middle America real estate. I have no doubt that wealthy coastal city residents will use their money to buy up inexpensive non-coastal city real estate with 4-6X higher net rental yields. Money is fungible and such profits will be arbitraged away in the long term.
Filing K-1 Tax Forms For REC Is Easy
Tax documents for real estate crowdfunding aren’t complex to file. Even if you have to file a K-1 for each individual investment, it takes at most 10 minutes if you using an online tax software. Or you can simply have your accountant punch in the numbers for an extra fee.
Real estate will always be my favorite asset class to build wealth. With the rise of real estate crowdfunding companies, investors are able to easily take advantage of larger real estate deals around the country much more efficiently.
Helpful Tip: I suggest taking a look at Fundrise, the pioneer in eREITs. They are also currently working on an Opportunity Fund to take advantage of tax-efficient Opportunity Zones. Fundrise was founded in 2012 and is open to all investors – accredited and non-accredited alike. For most people, investing in a diversified eREIT is probably the best way to gain exposure with much lower volatility. With Fundrise, you may get 1099s.
If you are an accredited investor who likes to buy your own individual deals, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities mostly in 18-hour cities. 18-hour cities have lower valuations, higher cap rates, and likely higher growth due to demographic trends. CrowdStreet is also free to sign up and explore. With CrowdStreet you should get K-1s.
Fundrise Growth And Performance
According to the latest public offering documents by Fundrise for its IPO, the firm manages roughly $1 billion in assets under management, has over 150,000 active investors, and 80 employees. Their AUM grow and investor signups have been very promising.
Fundrise’s five-year average platform portfolio has also done quite well, yielding a 10.79% return versus 7.92% for the Vanguard Total Stock Market ETF and 7.4% for the Vanguard Real Estate ETF. Their massive 14%+ outperformance in 2018 versus the Vanguard Total Stock Market ETF is particularly impressive.
By generating a strong 5-year return, Fundrise has taken a huge step forward in proving out what they have believed for so long: that a model of individuals diversifying into real estate through a direct, low-cost technology platform is a superior investment alternative to owning only publicly traded stocks and bonds.
Fundrise is free to sign up and explore. It is my favorite real estate crowdfunding platform.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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