Exchange options and their properties
The good news is that nearly any type of investment property will qualify for a exchange—except your primary residence.
Before You Do a Exchange, Consider These 4 Alternative Investment Options exchange investors have multiple choices — not just direct ownership of an income property. July 27, Getty Images One of the most attractive real estate tax benefits available in the U. About one-third of all commercial and multifamily property sales in the U. There are multiple ways the gain can be reinvested to qualify for preferential tax treatment.
For example, raw land can be exchanged for an office building, or a rental house for Replacement Property Interests RPI's in an apartment complex. The investor is the only owner of the property and is responsible for keeping it rented, making the mortgage payment, bookkeeping, maintenance, etc.
Examples include rental houses, small apartment complexes, and retail strip centers.
The primary advantage with this type of property is that the owner has total control. But along with control comes responsibility. Once an investor finds a property, he must perform due diligence title, survey, environmental report, etc.
Then the day-to-day management begins. For many real estate investors, this option works well for them. For larger properties, an investor can hire a full-time property management firm and still generate decent cash flow from the investment.
With a net lease property, the investor owns the property, but it's leased long-term to corporate tenants like Walgreens and Dollar Store, or to smaller franchise tenants like or Burger King. While the investor owns the property, the tenant has most exchange options and their properties the responsibility of maintenance and upkeep, as well as paying property taxes and insurance. Here, again, there are a few key issues to consider. An investor is still responsible for finding a property that fits their exchange, as well as completing the due diligence and financing.
1031 Exchange Options & Opportunities
However, once acquired, net lease properties can produce a steady stream of income with very little work, unless—and this is important—the tenant stops paying their rent usually because they go out of businessor chooses not to renew at the end of the lease term. Think about the time and costs of retrofitting a former Burger King so that it can be rented to a new tenant.
Such offers are only made through the sponsors Private Placement Memorandum PPM which is solely available to accredited investors and accredited entities. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Because investor situations and objectives vary this information is not intended to indicate suitability for any particular investor.
Upfront process of finding property and financing is eliminated. This happens before potential investors are shown the investment.
- Basically, property held for investment is like-kind with any other property held for investment.
- The Bottom Line In real estate, a exchange is a swap of one investment property for another that allows capital gains taxes to be deferred.
No landlord responsibilities. The sponsor is responsible for all of the property's on-going operations of the property owned by the DST—everything!
Stable income. If the value of the property goes up, the investors in the Exchange options and their properties benefit.
When the property is sold, the net profits are distributed to each investor in proportion to their ownership of the DST.
Similarly, as the mortgage balance is paid down over time, each investor is building equity in the property in proportion to their ownership in the DST.
Before You Do a 1031 Exchange, Consider These 4 Alternative Investment Options
For example, an investor could exchange into a DST that owns a suburban office building in Portland, a DST that owns a unit apartment complex in Raleigh, and a DST that owns a grocery-anchored retail center in Dallas. This means they give up all control over day-to-day operations of the property, as well as the decisions regarding the sale of the property, to the sponsor.
In addition, most sponsors hold regular conference calls, which allow investors to ask questions.
While RPI's have many attractive benefits, they are by no means right for all investors. Particularly those who want a direct say in their real estate investments.
A wide variety of property options are available for investors executing exchange transactions.
Leasehold Interests Offer Alternative 1031 Exchange Options
Here are a few things to think about: Are you comfortable with and willing to properly evaluate numerous real estate investments before finding a property that fits your exchange? Are you ready to perform due diligence and work through the challenges of obtaining a new mortgage?
Do you need or want the responsibility of managing your next property day-in and day-out? Are you comfortable in a passive investment with other investors?