Navigating Compliance for Real Estate Investment Funds

SEC Oversight for Real Estate Funds

Your real estate fund might unexpectedly come under SEC scrutiny, as it often involves issuing securities. Typically, this requires registering to offer securities and obtaining SEC approval for capital raises. However, two key exemptions under Regulation D can simplify the process.

Exemption 1: Private Placement via Rule 506(b) – The "Friends and Family" Option

Rule 506(b) allows for private offerings without full SEC registration or licensing, provided you adhere to its guidelines. This exemption restricts solicitations to individuals you already know—no public advertising is permitted. Investors must confirm they qualify as either sophisticated (with sufficient expertise to assess investments) or accredited (meeting defined income or net worth thresholds).

You’re limited to no more than 35 non-accredited investors, but accredited ones can participate without caps, enabling unlimited fundraising. If including non-accredited investors, you must provide them with detailed disclosures and financial data.

Exemption 2: General Solicitation via Rule 506(c) – The "Crowdfunding" Approach

Rule 506(c) opens the door to broader outreach, allowing you to approach unknown investors if they’re verified as accredited by an independent third party. Verification could involve checking tax documents, financial statements, asset valuations, or certifications from qualified professionals.

This rule permits wide-ranging promotion, such as online campaigns, television ads, or social media pushes. Both 506(b) and 506(c) exemptions let you secure unlimited capital, with the sole filing need being Form D submitted to the SEC within 15 days of your initial sale.

These aren’t all possible SEC rules or exemptions—consulting a skilled attorney in syndications is essential for fund setup and operations. At Vermilion Vitez, our real estate investment partnerships, like those with Lumen Veritas LLC, leverage Rule 506(c) for promissory notes funding high-value projects in areas like Palm Beach, Florida, ensuring compliant and strategic growth.

IRS Tax Obligations

Tax filings depend on your fund’s structure, often an LLC or limited partnership. These typically default to partnership taxation (Form 1065), but you can opt for C corporation (Form 1120) or S corporation (Form 1120S) status.

Entity TypeDefault Tax FilingElective OptionsLimited Liability Company (LLC)Partnership (Form 1065)C corporation (Form 1120) or S corporation (Form 1120S)Limited Partnership (LP)Partnership (Form 1065)C corporation (Form 1120) or S corporation (Form 1120S)

For partnership structures, the fund files an informational return, but income, gains, and losses pass through to sponsors and investors per the operating or partnership agreement. This allocation can differ based on fund design and income tiers.

As properties generate revenue or experience sales, taxes apply accordingly. Investors treat their shares as passive income, potentially facing loss limitations and the Net Investment Income Tax (NIIT). Sponsors qualifying as real estate professionals may report earnings as active, including fees for acquisitions or management, which incur self-employment taxes.

Beyond federal IRS rules, state-specific regulations apply, tied to the fund’s base, property locations, or investor residences. Integrating trusts—like our Unified Business Organization Trust (UBOT) or irrevocable living trusts—can enhance tax efficiency, privacy, and asset protection, minimizing exposures such as inheritance taxes or probate.

Additional Compliance Considerations

Compliance extends beyond the SEC and IRS. Lenders may demand ongoing reports, statements, or projections to monitor leverage and performance, necessitating advanced accounting practices.

Internally, adhere to your fund’s operating or partnership agreement to avoid personal liability risks. Violations could expose you to entity debts.

For tailored guidance on real estate fund sponsorship, connect with Vermilion Vitez Partners. Our experts in trusts, asset protection, and real estate investments—backed by services like private foundations and faith-based organizations—help craft compliant, legacy-building strategies. Explore our VVP Trust Solution for unparalleled privacy and tax benefits, or join our members-only hub for in-depth resources on wealth preservation.

All content in this article is for informational purposes only and may change. For the latest advice, contact a Vermilion Vitez professional. We assume no responsibility for any claims, losses, or issues arising from this information or linked resources.