1031 EXCHANGE

A misunderstanding of what qualifies as like-kind property is the single biggest cause of stress for investors rushing to complete the exchange within the prescribed deadlines. Many investors believe that like-kind property must be of the same type, be located within the same geographic location, and be held through the same ownership structure in order to satisfy the 1031 exchange requirements. In fact, not only does the property not have to be the exact same type in the exact same location, but you can also exchange for multiple properties or even swap into a co-ownership situation with other investors called a Tenancy in Common (TIC), or a Delaware Statutory Trust (DST). Knowing this will expand your options and allow you to find a replacement property fast and close on that property within the required timeframes. The most important thing to remember with a 1031 exchange is that the main criterion for establishing like-kind property is both properties in the exchange must be held for productive use in a trade or business to qualify as a real estate investment property.

Based on that definition, there is no requirement that the properties be of the same type or be in the same location. In fact, the IRS has been pretty liberal in determining what qualifies as like-kind property. The following non-comprehensive list of real estate assets would qualify as like-kind property:
- Unimproved property Vacant land, Net-lease property, Commercial buildings, Rental properties, Farms, Ranches, Resort property
- Industrial property, Retail property, Office buildings, Self-storage facilities, Senior living centers, Hotels, Motels, Restaurants
- Multifamily

As you can see, the possibilities are almost endless and there are no geographic requirements other than the properties need to be located in the United States.

Timing is crucial in qualifying for 1031 treatment.

- In a 1031 exchange, the 45-day rule for identifying the replacement property and the 180-day rule to finalize the exchange are the most critical.
- A 1031 exchange can be either simultaneous or deferred, with a deferred exchange being the most common by far—mainly for its flexibility. In a deferred exchange, an investor can sell an existing property but is not required to find and close on a replacement property until later (think 45-day and 180-day rules).
- In addition, for a deferred exchange, the investor must use a qualified intermediary to act as an agent for holding net proceeds from the relinquished property before they are reinvested in the replacement property.

DAY 1
SELL EXISTING PROPERTY- CLOCK STARTS

DAY 45
IDENTIFY UP TO 3 POTENTIAL REPLACEMENT PROPERTIES (any asset class, anywhere in the US)

DAY 180
COMPLETE PURCHASE OF YOUR 1031 EXCHANGE PROPERTY (1 or more properties)

Although fractional interests in a REIT or partnership would not qualify as like-kind property for 1031 exchange purposes, exchanging property for property in a co-ownership situation is allowable under two circumstances:

Property that is held through a Delaware Statutory Trust (DST) Property that is held through a Tenancy-in-Common (TIC)

Often, you can trade into a DST controlled by a REIT and then later do a 721 UPREIT to exchange DST ownership into REIT shares. This is best for an expert to explain and may be more suitable for advanced 1031 exchanges (meaning, after they have completed 1 or more exchanges).

TICs allow for greater diversification of your investment portfolio. Fractional or co-ownership interests in real estate through TICs allow you to acquire—together with other investors (no more than 35 co-owners)—a larger, potentially more stable, secure, and profitable real property asset than what you could have acquired and afforded on your own.

The one most cited drawback of TICs is personal liability. Because all co-owners must be named on the title and must be listed as a co-borrower on any mortgage on the acquired property, each co-owner can potentially be held responsible for the full outstanding amount of the mortgage, as well as for any potential property-related liabilities like personal injury and hazardous waste.

Remember the fundamentals of 1031 exchanges:
- You want your replacement property to make economic sense. No point in deferring capital gains if the property you exchange into performs poorly financially.
- Lose the stress with the 1031 exchange deadlines. Remember all the options, including the wide range of properties that would qualify as like-kind property, available to you
- Explore the types of co-ownership that would allow for more diversification and insulation from downturns.
- Follow other investors into new markets. Take the opportunity to exchange into properties that perform better financially and in better-performing regions like the Midwest.

Keep your options open to meet your deadlines and potentially swap into a better financial situation.