What does a 1031 exchange offer to investors?
The benefits of owning investment properties are hidden to none. Such properties are a great source of income for real estate investors. The revenue generated by such properties depends on location, area, job opportunities, amenities, etc. Owners receive a regular flow of income in the form of rent. However, as the property starts aging, the landlord needs to spend a considerable amount of time and money managing the asset. Due to rising responsibilities, some investors sell their properties and reinvest the proceeds in another income-producing asset. They make use of Section 1031 of IRC for the transaction.
A 1031 exchange lets investors defer a big chunk of capital gains tax if they reinvest the sale proceeds in another like-kind property. ‘Like-kind’ states that both old and new properties must be similar, i.e., they must be used for business or trade purposes. For example, you can exchange an industrial property for a multi-family apartment or vice-versa as they both are used to generate income.
Problems faced by investors in locating 1031 exchange replacement properties –
- Contacts – Having a long list of investment contacts helps when locating a property. You need reliable sources that can help you find the best properties under a given budget. The bigger the contact, the easier it is to find an asset.
- Inadequate knowledge of the market – The kind of market you invest in determines the returns you will receive. There is no rocket science in comprehending that not every location offers the same benefits. Not knowing the market where you’re planning to invest in can undoubtedly impact your investment.
- Availability – What if the property you identified is not available when you need it? The availability of properties has always been a concern for 1031 exchange investors. With more investors doing 1031 exchange transactions, it has become challenging to locate a high-performing replacement asset when required.
Where Should You Spend Your 1031 Sale Proceeds?
If you’re stuck in your 1031 property identification or are running out of time, we suggest closing your exchange with any of the following investments.
- DST Investment –An excellent opportunity to secure your monthly income and expand your investment simultaneously. You can acquire a DST ownership for a much lesser value than what you’ll have to invest in purchasing a separate property of such standard.
- NNN Investment –If you’re losing a big chunk of your monthly income on operating expenses, it’s time to switch to a NNN (triple-net) property. Enjoy stress-free income for the rest of your life.
- TIC Investment –If you wish to own a large investment property but lack the budget, you can fulfill your dream by investing in a TIC structure. You also get complete control over your asset.