Understanding Replacement Properties
The property you sell during a 1031 exchange is called relinquished property, while the new property you acquire is called replacement property . To do a successful 1031 exchange, both the relinquished and replacement properties must be investment property or held in a business or trade.
Generally, you can replace any type of investment property with any other kind of investment property. For instance, you can exchange a plot with an office building or exchange a commercial space with an apartment complex.
Moreover, you can exchange a relinquished property with one or multiple replacement properties. In fact, you can even exchange 100-acre farmland with two rental homes, an industrial space, office condominiums and two Family Dollar stores.
Finding The Right Replacement Property
From the day you close on your relinquished property, you are given only 45 days to identify replacement properties. Once the 45-day ID period ends, you can not change your plans for reinvesting. Therefore, it is often recommended to identify several replacement properties in case the first option falls through.
The 45-day ID period is a short period to identify suitable options for your 1031 exchange. As a result, many exchangers find themselves scrambling for the best options. Keeping this in mind, we offer assistance in this process. With an extensive industry experience of over 20 years, we are connected with the 1031 exchange experts who specialize in helping you find the right replacement property.
Our team of registered investment advisors and QIs can help you complete the process and finalize a replacement property that actually comes with added advantages. The 45-day ID period can be a stressful time, and it’s true that the stakes can be high. But, we’re here to help. We can help you find the right replacement property within the time restraints defined by the law.
We Specialize In Locating Investment Grade Property That Generates Passive Income. Add Your Heading Text Here
According to our experience, most exchangers are usually baby boomers or older, seeking passive income. And, they don’t want to be associated with the hassle of managing an investment property. Their main aim is to preserve their principal and generate monthly income without any active involvement.
Below are the two options for passive 1031 dollars. Though you might have heard about them before, it’s good to have all your options in one place.
Triple net lease properties require the tenants to cover everything, including insurance, taxes, monthly rents, repairs, maintenance and utilities. If you prefer simplicity and security, you can exchange into single-tenant properties that come with guaranteed leases by a regional or national tenant. Some examples may include Walgreens, Dollar General, Tractor Supply, AutoZone, Goodyear or O’Reilly Auto. Most net leases come with around 15-year terms, which can be renewed.
DSTs are mostly similar to TICs, but with a few significant differences. Rather than purchasing an undivided interest in one property, a DST would allow the exchangor to purchase a prorated share of a portfolio of income-producing properties. DSTs come with an ability to generate regular passive income, thus, making them an ideal option for securing retirement.
For instance, you can place $100,000 in a DST, consisting of four medical properties, $100,000 in another DST that has a 300-unit apartment complex and $100,000 in another, which has a dozen NNN properties. With just $300,000, the exchangor would be able to diversify into 16 new properties in different locations and industries.
Another difference between TIC and DST is that all properties within a DST are leveraged. Meaning, if an investor tried to acquire that property on their own, they would have to pay for an appraisal, tax returns and closing costs. However, in the case of a DST, the property is actually owned by the trust, which already has its financing in place. This means no more shopping for financing.
Lastly, a DST is professionally managed and might be available with portfolios of debt-free properties, especially if you need debt replacement during the 1031 exchange.
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