If you own rental property — whether an entire rental or you are renting part of your house out or some other type of investment property — you may qualify for a tax-deferred 1031 exchange when you sell.
As of this moment, investors can usually exchange one investment for up to three investments of “like kind,” as well as exploring other exchange scenarios. (The IRS offers the ultimate definition of like-kind.)
But what if being a landlord or Airbnb host wasn’t the “passive income” you thought it would be?
If you are hesitating pursuing a 1031 exchange for another investment because it seems complicated or you aren’t sure what investments you might exchange your current property for, read on.
Delaware Statutory Trusts (DSTs) may be the passive investing you had hoped for
The synopsis from popular 1031 exchange Qualified Intermediary (QI) company IPX1031 is perfectly clear: “DSTs are passive management/current income investment opportunities where investors do not have the typical responsibilities associated with actively managing investment properties. Also DST investment offers a convenient and timely 1031 Replacement Property solution when the market for traditional commercial/investment properties is tight.”
Generally DST investments are held for 2 years or more. Here’s more info to help you decide if a DST would be right for your investing style.
Learn about 1031 exchanges before you need to do one
There are numerous 1031 exchange “intermediaries” who can educate you and facilitate the exchanges — whether you are selling then buying or buying before selling. Whatever scenario you can imagine, they probably have seen it and will be happy to help you identify the steps. They often have webinars, so sign up for email lists from all of them if you want to become an expert!
Discuss your idea of doing 1031 exchanges whether for replacement properties or into DSTs with your real estate agent, accountant, and tax lawyer early-on as well.
The timing can be tricky, and planning is essential.
Among the largest 1031 exchange companies are:
- IPX1031 (owned by publicly-traded Fidelity National Financial Company)
- First American Exchange
Also see Bigger Pockets’ article on selecting a Qualified Intermediary.
Please be sure to vet any exchange company you choose to make sure they are the right partner for you.
Get involved in keeping 1031 exchanges alive
For years there have been threats of 1031 exchanges being eliminated by the parties that be. If you’re not sure this matters, read this article about how the very old 1031 Exchange tax-related mechanism has powered the economy in past decades and is not a loop hole for the “ultra rich” (or at least not only for the ultra rich).
I’d love to hear any success stories!
