Tailoring 1031 Exchange Options to Fit Your Investment Strategy

1031 Pros

Jan 96 min read

A 1031 exchange allows investors just like you to diversify their portfolios, make crucial investment adjustments, and otherwise mix things up. While there are multiple opportunities involved in any exchange, it’s vital to make smart decisions.

Your 1031 exchange options include everything from residential real estate to vacant city lots. We’ll explain how these transactions work and help you make a smart decision about your financial future here.

What Is a 1031 Exchange?

As the name implies, a 1031 exchange involves an exchange of properties. In simple transactions, an investor sells one property and buys another. However, 1031 exchanges can also involve buying a property first and then selling the original.

Any gains made in the sale of the property are tax-deferred in a 1031 exchange. Those obligations are moved into the new property. If you sell the new property in another exchange, the taxes are pushed forward yet again. If you keep the property until death, your heirs aren’t required to pay those taxes.

What Does ‘Like-Kind’ Mean in a 1031 Exchange?

The IRS has very specific rules regarding 1031 exchanges. One of them involves so-called “like-kind” properties. These regulations specify the types of properties that can be involved in the exchange process.

Per IRS rules, both properties must be similar enough that they’re considered like-kind. Typically, that means they are of the same class, character, or nature. Quality or grade doesn’t matter, and most real estate is similar to other types of real estate.

These rules mean that you have several 1031 exchange options. It’s crucial to understand them and make a smart choice.

What Are Your 1031 Exchange Options?

You’ve decided to use a 1031 exchange as part of your investment strategy. For the purchase part of the transaction, you have several options. These are the most common versions:

Residential Real Estate

Residential real estate is typically defined as property developed for people to live on. You could purchase a small home that could be rented to one family, or you could buy a large building filled with apartments for multiple families. Any investment that you purchase specifically to rent for someone to live in fits within this category.

Residential real estate could be a good opportunity in tight housing markets. When families can’t find properties to purchase, they may settle for rental versions. If you own them, you could profit from their rent payments.

Commercial Real Estate

Commercial real estate is typically defined as property that generates income. However, in this instance, we’re focused on properties used for commercial transactions. Assets like hotels, office parks, and shopping malls would fit into this category.

Investing in commercial real estate could be a wise move in a booming part of the country with plenty of commerce. For example, if you can spot a geographic area with plenty of residential construction permits, investing in the closest shopping center could be a wise move for the future.

Industrial Real Estate

Unlike commercial real estate, industrial properties are typically devoted to things like manufacturing products, storing them, or packaging them for shipping. Warehouses, factories, and fulfillment centers all fit into this category.

If you’re exploring opportunities in areas with plenty of freeways, highways, and airports, industrial real estate could be a smart choice. Remember that you need a community that could staff these facilities too.

Farmland

In 2023, there were 1.89 million American farms. In locations like this, farmers grow crops, raise animals, and create foods and products for people all across the United States. Farming is a core part of American culture, and the work done here makes life possible.

Plenty of farmland is available in some parts of the country. This can be a good choice for investors who want to invest in specific crops like soybeans, grass seed, and other high-profile goods.

Vacant Lots

In a 2001 study, researchers found that 15% of an average city’s land was vacant. Those numbers may have changed in recent years, but plenty of communities have spaces that are just itching for new buildings and investments.

A vacant lot could represent an important investment. For example, you could purchase the property and install a rental unit in a part of town with a lack of decent housing. Something like this could bring plenty of profits in time.

Delaware Statutory Trusts

A Delaware statutory trust (DST) is a type of fractional ownership. Investors purchase a portion of a property and reap benefits without having to tackle day-to-day tasks like collecting rent or fixing broken pipes.

DSTs are designed for 1031 exchanges, allowing people to close deals very quickly. These can be good options if your other investment options fall through. They can also be smart choices for people who want to keep investing in properties without devoting so much time to their care and maintenance.

What Else Can You Try?

While a 1031 exchange can be a good option for many investors, it comes with plenty of rules and regulations. Make no mistake: These transactions are much more complicated than simply selling a property and buying another one. They’re not right for everyone.

If you’ve explored your options and decided another exchange isn’t right for you, simply sell instead. Take the profits from the sale and consider another investment opportunity, such as the following:

Retirement plans: Some employers set up 401(k)s for their staff. With an account like this, you could set aside your profits and let them grow until it’s time to retire. An IRA works in much the same way. Tax limits associated with these plans can mean that you can’t set aside the entire amount, but you could put some into your account for tax benefits.
Mutual funds: A mutual fund allows you to purchase things like stocks and bonds with the assistance of other investors. These accounts are typically run by professionals, and they can come with decent returns.
Stocks and bonds: As a private investor, you could purchase stocks and bonds on the open market and let the funds grow with time. You may not reap immediate tax benefits, but your investments could grow with time.

You could also use your profits to invest in another tangible asset, such as artwork or firearms. These items can’t be purchased as part of a 1031 exchange, but they could be purchased with the profits of the sale of a property. Some types of tangible assets come with big returns, especially if they’re cared for properly. And purchasing them could be both quick and easy.

These are a few of the options open to you. If a 1031 exchange isn’t right for you, these tools can help you keep your money circulating and your investments growing.

How Can You Decide?

Making smart decisions about money isn’t always easy. Many investors have full-time jobs, busy families, and an active life. They don’t have the time or energy to examine every option and make the right decision. Sometimes, getting outside help is smart.

In a 2023 survey, just 37% of Americans said they worked with a financial advisor. Those that did were more confident about their financial future. If you don’t have someone like this on your team, now could be a good time to make that addition.

You could also tap into the experience and expertise of people like realtors and market analysts. Gathering data from these experts could help you decide which direction is best for your money and your future.

Work With My 1031 Pros

You’ve examined your options and decided that a 1031 exchange is the best option for you and your financial future. Ensure that your transaction goes as smoothly as possible by teaming up with 1031 Pros. We specialize in these complex transactions. We think about them all the time, and we help people just like you get started.

When you work with us, you take any guesswork out of the equation. It makes the process of successfully completing a 1031 exchange exponentially easier. Contact us today to get started.