Replacement property acquired in a 1031 tax-deferred exchange must be “like-kind” to the real estate being sold. Like-kind means “similar in nature or character, notwithstanding variations in grade or quality. For the 1031 exchange commercial properties to pass as “like-kind” they must be maintained for productive use in a trade or business or operated for investment purposes. A 1031 exchange properties may include any of the following types:
Our clients continuously inquire whether their property passes for a 1031 Exchange. Section 1031 promotes the exchange of like-kind property. For a successful 1031 property exchange, like-kind applies to any property that is being used for business or investment purposes. Suitable 1031 Exchange properties are mostly land or commercial property, such as an office building or a retail space. Such properties are always a great form of investment and will not be questioned by the IRS. For more natural understanding, one can check whether a property they are selling and the property they are buying is income producing or not. For example, a home that has been rented out a few months each year would generate income in the form of rent. A house acting as a primary residence, and never rented out, would not be considered an investment property for a 1031 Exchange.
Any property purchased or sold with the purpose of a “fix and flip,” are not suitable for a 1031 exchange. These properties typically show a short-term gain and are not considered income producing if not rented out. For these reasons, if an investor wishes to use these in a 1031 exchange, they may end up with a failed 1031 Exchange.
The below-mentioned properties are the ones which are considered highly suitable for a 1031 Exchange.
Single Family includes condominiums, town homes, houses, coop’s and the like. They are estimated dwelling units that lend themselves to personal use. To adhere to 1031 exchange guidelines, you must register rental activity and hold this property for a minimum year or two to suit as an investment.
Multi-Family residential properties such as apartment complexes are highly popular among investors, including real estate holding companies, pension funds, partnerships, and joint ventures. Handled efficiently, they have engaging cash flow and potential for appreciation in the long term.
Commercial office buildings are for the experts in the real estate industry. Changes in the economy, insurance, and legal challenges, zoning changes, property management efficiency, air rights, and more come full force. Experience coupled with the ability to hold for the long run bears fruit typically for the astute commercial office property investor.
Warehouses are sought-after 1031 exchange commercial properties for the investor scanning for single user creditworthy tenants.
Single and Multi-Tenant Retail can be critical investments in down economic environments or if the tenant has a dying product line. Due diligence of marketing data such as valid traffic counts, steady franchise sales, and competitor analysis to recommend such a purchase is highly advisable. However, in a geographically strong market or a robust economy, the CAP rates are among the highest in commercial real estate.
Marinas are specialty commercial assets that work well in tourism, cargo shipping, and fishing environments. Deed restrictions occur due to government leases in place that are term specific. Land vs. water boundaries makes it a hurdle to substantiate title to deeds and can plunge rule #5 proper title holding requirements of a 1031 exchange.
Self-storage facilities have grown significantly as substantial investments in recent years for 1031 exchanges. If handled well, these 1031 exchange properties could render attractive cash flow with great potential for appreciation and minimal property administration.
Oil and gas 1031 exchange commercial properties are considered risky investments for apparent reasons. Although highly speculative, their returns can be handsome if a well hits oil or gas reserves. Those who promote these investments structure them in sophisticated lease arrangements to suit for 1031 exchanges. As with any investment property, due diligence and seeking the advice of an attorney well versed in the oil and gas industry before identification is a mandate.
Hotels are most likely privately held investments that have different accounting standards. Opportunities exist in emerging markets sought by 1031 investors, as first market hotel properties require longer-term holding periods to justify current asking prices.
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.