Real Estate Crowdfunding Explained

Real estate crowdfunding platforms allow investors to contribute relatively small amounts of capital toward a real estate project or portfolio, typically through an online platform that pools funds from many investors into a single investment vehicle. Most crowdfunding platforms structure each offering as an interest in a fund, LLC, or real estate investment trust that in turn owns or lends against the underlying real property, rather than giving individual investors any direct ownership interest in the real estate itself. This entity-based structure is what most clearly separates crowdfunding from direct real estate ownership, even though the underlying properties involved may be similar.

Crowdfunding offerings generally fall into two broad categories, equity offerings and debt offerings. Equity crowdfunding gives investors a share of ownership in the entity that holds the property, with returns tied to rental income and eventual sale proceeds. Debt crowdfunding, sometimes described as real estate lending or peer-to-peer lending, involves investors effectively acting as lenders to a property owner or developer, with returns based on interest payments rather than ownership appreciation. Both structures typically involve an interest in an entity, whether an equity stake or a loan receivable, rather than a direct interest in real property.

Why crowdfunding generally does not qualify for a 1031 exchange

Because most crowdfunding offerings involve an interest in an entity or a debt instrument rather than a direct interest in real property, they generally do not satisfy the like-kind property requirement under Section 1031, regardless of how closely the underlying investment resembles direct real estate ownership in its economics. An Oklahoma City, OK investor with exchange proceeds who is considering a crowdfunding platform as a way to diversify into multiple properties with a smaller capital commitment per property should understand that using exchange funds for a typical crowdfunding offering will generally trigger recognition of the deferred gain, since the offering does not meet the real property requirement that a 1031 exchange depends on.

Crowdfunding offerings, whether equity or debt-based, are also typically securities offered under a federal securities exemption, most commonly Regulation D for accredited-investor offerings or Regulation Crowdfunding for offerings open to a broader investor base with lower investment limits. Crowdfunding interests may be securities. We do not sell securities. We provide introductions to licensed providers only. Investors considering a crowdfunding platform should review the specific exemption and investor eligibility requirements for each offering directly with the platform or a securities professional.

Diversification without giving up 1031 eligibility

An investor who wants the diversification benefit crowdfunding platforms offer, spreading capital across multiple properties rather than concentrating it in a single acquisition, while still preserving 1031 eligibility for exchange proceeds, generally needs to look at DST offerings instead, since some DST sponsors offer smaller minimum investments that allow an investor to split exchange proceeds across multiple DST interests in different property types or geographic markets. This approach can replicate some of the diversification appeal of crowdfunding while remaining within the like-kind property requirement that a straight crowdfunding investment would not satisfy. The site's DST Replacement Properties service can help an Oklahoma City, OK investor evaluate whether splitting exchange proceeds across multiple DST interests fits their diversification and income goals.