Best 1031 Exchange Options
Why do you need the 1031 exchange?
What is a 1031 exchange? It is one of the real estate transactions that allows you not to pay taxes on the property sale if you use the sale proceeds to buy a replacement property. The rules state that you have to identify the property you are going to purchase within 45 days and complete the whole process within 180 days.
Which kind of property can you exchange? According to 1031 exchange rules, the property is supposed to be of the same nature, class, or character as the estate you relinquish. It doesn’t matter how they differ in quality or in grade. You can consider different estates to be like-kind if both of them are located in the USA. There are some regulations in the use of personal property, vacation home, secondary home, and primary residence though.
Best 1031 exchange options
Considering different types of estates, you can distinguish the 5 best 1031 exchange options for you.
Delaware Statutory Trusts
It is one of the most common 1031 exchange options which allows to profitably purchase the real estate assets. Delaware Statutory Trust is primarily designed for professional real estate firms. This option allows getting “beneficial interest” in a larger estate or the portfolio of the list of properties. It covers the following types: industrial properties, senior or student housing, multi-family apartments, self-storage, essential net-lease retail, memory care, and net-lease medical office.
The greatest advantage you can take with Delaware Statutory Trusts is purchasing partial ownership in quality real estate assets, which would be impossible to afford on your own. Moreover, DSTs have comparably low minimum requirements for the investors. Delaware Statutory Trusts is professionally managed, DTTs sponsors cover such activities as structuring, securing, financial reporting, and the sale of properties.
What can we call multifamily property? It is about a commercial multifamily apartment building that has more than five units.
One of the greatest advantages this option provides is the ability to provide a constant stream of income. Analyzing the conditions during economic downturns, it would be fair to mention that apartment building as a replacement property is the most enduring and reliable commercial property type. One more benefit of multifamily property as a 1031 exchange option is the variety of prices and sizes you can choose from. What is more, debt financing is available at relatively favorable terms.
Net Lease Properties
It can be divided into triple net properties and double net properties. This type of estate has a specialized lease requiring owners to pay a monthly rental payment with all insurances, taxes, and supports related to this kind of property. NNN rent objects are mostly popular in retail properties and properties with a single owner. Net lease properties are long-term and can be managed for up to 50 years. It covers such property types as a medical office, retail, food services, commercial office, services, gas stations, and banks.
Triple Net Lease requires the tenant to be responsible for all managing expenses. The exception can be roofs and structural repairs. Double Net Lease is slightly different and provides the owner with the responsibility for the structure, roof, and property taxes.
Net Lease Property is appreciated by the stability in income. One more benefit is related to limited management requirements. Additionally, Net Lease Property provides an opportunity to control the state of financials related to the property. Talking about triple net properties it is necessary to mention they are mainly used by those, who want to own the estate but don’t have enough time to manage it.
Tenants in Common (TIC) properties
By its structure, Tenants in Common properties are similar to Delaware Statutory Trusts. However, they are different in some specifics and the process of management. TIC is a form of ownership that allows getting undivided partial interest in a bigger property. Compared to DST, it has fewer restrictions and requirements.
By their nature, TIC properties are value-add and usually improve the property in a substantial way or redevelop it. The number of investors in this type of ownership is often limited. Additionally, they can be operated and funded by the parent real estate firm.
Tenants in Common properties provide customers with a list of benefits. One of them is utilizing exchange dollars to get partial interest in a major property. You also have an opportunity to get access to the expertise and skills of national real estate firms. TIC is the most suitable for those, who are searching for refinance opportunities, higher potential appreciation, and a shorter investment timeline. However, customers are supposed to have a higher investment minimum.
Fee Simple Properties
This is the most traditional way to get an exchange property. It means that an investor completes all steps of the operation on his own, including searching for a replacement estate and purchasing it. The main requirement stated to the property is to be like-kind. Fee Simple Property covers all the types: commercial office, residential rentals, raw land, self-storage, multi-family apartments, and others.
Fee Simple Property provides an investor with all the challenges, risks, and rewards of owning real estate. The name of the owner is presented on any debt that is related to the property. One of the benefits, this option provides, is the complete freedom in making decisions and doing all kinds of operations. The most appreciated part of this freedom is having 100% of the cash flow.
Owners often choose an option of Fee Simple Properties when they want to exchange multiple properties for a single but major one. It is also common in the case of selling estates to exchange into ones with value-add potential.
For all the investors, the 1031 exchange gives an opportunity to defer tax payments on the property sale. It is important to deeply analyze the type of property you have, and the aim of your operations, to choose the most appropriate option for you. It is recommended to work with an expert third person to complete the whole process successfully.