Plan Your Replacement Property Strategy
A 1031 exchange can give real estate investors an opportunity to sell qualifying investment property and reinvest into replacement real estate while deferring recognition of certain capital gains taxes.
But completing an exchange is only part of the decision.
Customized 1031 helps investors understand their options, evaluate replacement property strategies, and approach the next investment with a plan built around their goals.
What Is a 1031 Exchange?
A 1031 exchange, also known as a like kind exchange, allows an investor to exchange qualifying real property held for investment or business purposes for other qualifying real property while potentially deferring recognition of capital gain.
For real estate investors, this can provide an opportunity to keep more equity invested rather than recognizing the entire taxable gain at the time of a qualifying property sale.
The replacement property does not necessarily have to be the same type of real estate as the property being sold. What matters is whether the properties and transaction satisfy the applicable requirements.
More Than a Tax Decision
For many investors, a 1031 exchange is also an opportunity to reconsider how they want to own real estate.
You may be looking to:
- Reposition equity into another market or property type
- Reduce active property management responsibilities
- Diversify real estate holdings
- Consolidate multiple properties
- Move from one property into multiple investments
- Explore professionally managed real estate
- Adjust your investment strategy as your priorities change
The right replacement property should reflect more than the need to complete an exchange. It should also make sense for what you want your real estate portfolio to accomplish next.
Understanding the 1031 Exchange Timeline
Timing is one of the most important considerations in a 1031 exchange.
In a typical deferred exchange, investors generally have 45 days to identify potential replacement property and 180 days to complete the exchange, subject to applicable tax return timing requirements.
Those deadlines can make replacement property planning especially important. Waiting until after the relinquished property closes can significantly reduce the time available to evaluate potential investments.
Customized 1031 helps investors begin thinking about replacement strategies early so they can approach those deadlines with a clearer plan.
Finding the Right Replacement Property
A replacement property strategy does not have to begin and end with purchasing another property that looks like the one you sold.
Depending on your objectives, potential strategies may include directly owned real estate, multiple replacement properties, or professionally managed real estate investments that may qualify for consideration within a 1031 exchange.
Customized 1031 helps investors evaluate potential replacement solutions based on factors such as investment objectives, management preferences, income considerations, diversification, financing, risk, and long term plans.
Can a Delaware Statutory Trust Be Used in a 1031 Exchange?
For some accredited investors, a Delaware Statutory Trust may provide another way to acquire an interest in investment real estate without taking on the same day to day management responsibilities associated with direct property ownership.
Certain properly structured DST interests may qualify as replacement property for a 1031 exchange.
DST investments are not appropriate for every investor and involve considerations including liquidity, fees, financing, sponsor experience, property performance, and investment risk.
Customized 1031 helps investors evaluate DST opportunities as part of the broader replacement property conversation.
How Customized 1031 Helps
A 1031 exchange can involve several professionals and moving pieces. Customized 1031 focuses on helping investors understand and evaluate the investment side of the decision.
Doug Zator works with investors to:
Understand Your Objectives
Start with the property you are selling and what you want your real estate equity to accomplish next.
Evaluate Your Options
Review potential replacement property strategies, including DST opportunities when appropriate for consideration.
Stay Coordinated
Work alongside your Qualified Intermediary, tax professional, attorney, real estate broker, and other professionals involved in the exchange.
Move Forward With a Strategy
Approach the replacement property decision with a clearer understanding of the available options and how they relate to your goals.
When Should You Start Planning a 1031 Exchange?
Ideally, the replacement property conversation begins before the sale of your existing investment property closes.
Starting early gives you more time to understand the exchange requirements, establish your investment priorities, and evaluate potential replacement strategies before the identification period begins.
If your property is already under contract or your exchange has already started, the timeline becomes even more important.
Have Questions About 1031 Exchanges?
Every exchange has its own circumstances, but many investors begin with similar questions about qualifying property, timelines, replacement properties, taxes, Qualified Intermediaries, and DSTs.
Our 1031 Exchange FAQ provides straightforward answers to many of the questions investors encounter while considering an exchange.
Start Planning What Comes Next
Selling investment real estate can create an opportunity to rethink how your equity is invested.
If you are considering a 1031 exchange, Customized 1031 can help you understand the available replacement property strategies and determine which options deserve further consideration.
Start the conversation before the deadlines begin driving the decision.