How to Shop & Compare 1031 Exchange Properties

As part of a successful 1031 exchange, you must identify and purchase a replacement property. Finding the right opportunity could ensure that you reduce your risks, increase your profits, and make a smart move for your future.

Here’s what you need to know about how to compare 1031 exchange properties for sale.

What Is a 1031 Exchange?

If you’re new to real estate investing, you may not be aware of what a 1031 exchange is and how it might benefit you. This quick recap may help.

A 1031 exchange is a complex transaction involving two properties. One property is sold, and the funds are placed in trust with a qualified intermediary (QI). Then, the funds are used to purchase another property.

The Internal Revenue Service (IRS) created a 1031 loophole that allows investors to complete these transactions and avoid the associated taxes. Your obligations aren’t forgiven, but they are deferred. Taxes are rolled into the new property in an exchange, potentially saving investors a significant amount of money.

What Properties Can Be Included?

IRS rules regarding 1031 exchanges are tight and impossible to modify. Some of these regulations involve the types of properties that can be both bought and sold in these processes.

The IRS says properties in a 1031 exchange must be held for use in trade or as an investment. Properties you use as your primary residence or vacation home are typically excluded from a valid 1031 exchange.

6 Factors to Compare in 1031 Exchange Properties for Sale

Your 1031 exchange opportunities can be vast, and it isn’t always easy to find the perfect one for you and your future. By comparing the following six factors, you could make the right choice.

1. Cost

Most investors participate in a 1031 exchange to avoid tax obligations. However, if you choose the wrong property, you could experience a taxable boot.

An exchange can generate taxable boot if the property you choose is worth less than the one you’ve sold. If you take the excess as cash, the IRS will ask for a tax payment on that amount.

Capital gains tax can be as high as 21% for corporations. If you take out a large amount of money after an exchange, you could wipe away some of your profits via your tax obligations.

Some investors avoid this problem by investing in several properties. Others invest in things like a Delaware statutory trust (DST) with the excess from the sale. However, the easiest option is to rule out properties that don’t cost enough to rule out the boot.

2. Speed

Per IRS rules, a 1031 exchange must be completed within 180 days. That means investors have about six months from the date the sale was completed to purchase the replacement. The time frame might seem long, but it could go by quickly.

Some properties are wrapped up for sale and attached to motivated owners who will do anything to finish the sale. Others come with deep entanglements, such as incomplete foreclosures or owners who can’t decide if it’s time to sell.

In general, it’s best to focus on properties you know you’ll buy before the deadline comes and goes. If the project seems somehow tricky or complicated, it might be wise to pass.

3. Location

Some properties are situated in ideal markets for investors. By doing a little head-to-head comparison work, you could differentiate a good property from a bad one.

For example, you could look at a community’s absorption rate. This number refers to the rate at which homes turn over within a specific period. The Dallas-Fort Worth area had a commercial absorption rate of 15,691 in Q1 of 2024, while Orlando’s rate was only 8,291. Numbers like this can help you spot a community on the rise.

4. Type

As we mentioned, the IRS requires that investors use only commercial properties in their 1031 exchanges. However, you have plenty of options to choose from.

For example, offices make up 15% of the commercial real estate market, but there are others, including the following:

Multifamily properties
Sports facilities
Retail properties
Industrial facilities
Healthcare campuses
Hospitality-sector properties
Self-storage facilities

Don’t be afraid to look for different types of investments. You can trade something in one sector (like an office) for one in a different industry (like warehousing).

5. Exchange Goals

Why are you participating in a 1031 exchange process? Your underlying motivations can play a big role in identifying the right property.

For example, office environments in the United States were once considered safe and smart investments. However, experts say prices have tumbled in this critical market. If you’re deeply invested in office parks, switching to a different sector could help you diversify and reduce your overall risk in the long run.

Some investors are also interested in participating in an exchange to improve their cash flow. For example, if you’re deeply invested in something like a hotel in a part of the country with low tourism rates, switching to a multifamily property could increase your payouts and allow you to make money.

You might also be interested in tapping into new opportunities in the real estate market. If your area is experiencing a downturn, you could break up a large investment into several smaller ones and increase your potential profits over time.

6. Management Style

Some 1031 exchange properties for sale require plenty of hands-on management. For example, if you purchase a multifamily property and don’t have staff, you’ll be required to make repairs, find tenants, and more. For some investors, this is ideal. It allows them to remain closely tied to their investments.

Other 1031 exchange properties for sale don’t need management. For example, if you participate in a DST, someone else takes care of all the details and you’re not required to do anything. If you want to watch your investment grow without doing all that work, this could be ideal for you.

Always ask questions about how much you’ll be asked to do and think about how you’d like to handle those tasks. Continue the time involved in each step of each task. Your analysis can help you decide which option is right.

Get Help With Your 1031 Exchange

Once you’ve compared the 1031 exchange properties for sale, get help completing the transaction safely and on time. Work with 1031 Pros. We use an FDIC-insured individual account for each transaction, and every one is secured with dual signature requirements. Your investment stays safe and secure while you identify and purchase the right replacement. Contact us to get started on comparing properties and choosing the right one for you today.