Options Besides A Direct Property Purchase

Member since 2023 · 1 post · 2 votes

Hello,

We are considering selling our investment properties. We'd like to minimize or delay capital gains as much as possible. I've been reading about 1031 exchanges, and it seems like there's some options like property improvements. We don't want to (and can't) purchase an entirely new house with interest rates at current levels - is there any way 1031 funds can be used to funnel back into our other investment properties that we are not selling? Like, say, a refinance? Or even just directly paying off the loans on our other properties - all of which are under the same business entity. Really we're open to any possible options to avoid capital gains (at least for now) BESIDES moving into the house for two years and BESIDES buying a whole new property.

Thanks,

Jonathan

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Whitney Nash

CES® , Qualified Intermediary for 1031 Exchanges · McKinney, TX · Member since 2018 · 42 posts · 144 votes

Hello @Jonathan Moonen,

DSTs, as previously stated, are often a good alternative to 1031'ing into something other than physical property. 1031'ing into oil and gas mineral rights could also be an option if they are "1031 friendly". There are certain net worth requirements and minimum investment amounts that you'll want to ask about when looking at different DST and O&G companies and offerings.

You may also want to look into purchasing vacant land as replacement property as well since price points can be less than a house depending on size and location.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Jonathan Moonen, The only way to make a 1031 exchange work (either a regular or reverse/improvement exchange) is if you don't already own the property. If you own the property you cannot exchange into improvements on it. Or use 1031 proceeds to pay down the loan.
If you have the ability to sell using owner-carry financing then that would delay paying tax. You would recognize and owe the tax as the payments come in. Investing in an opportunity zone also avoids a 1031 exchange. They're not as beneficial as in the past but there's some deferral available.
Most investors in your shoes will opt for Delaware Statutory Trusts (DSTs) which are 1031 compliant, completely passive, and don't make you apply for new debt. You simply assume the institutional debt already on them. But it is non-recourse to you. You are not personally liable for the debt.
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Ellie Perlman
Multifamily investor · Boston, MA · Member since 2017 · 281 posts · 521 votes
3y
Another option to consider along the same line as a DST is an IST (Installment Sales Trust). The key is to make sure it's set up correctly.
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Brandon BruckmanPro Member
Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
3y
You could do a Qualified Opportunity Zone Fund (QOZ). Invest the gain and keep the basis. Use that basis to invest back into your properties (or do whatever you want with it).
You do not need to perform a 1031 exchange to utilize QOZs. Only invest the gain by 180 days after the sale of your property.
You would owe tax on the gain by the end of 2026. Hopefully, the QOZ is making returns to cover that tax bill.
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Whitney Nash
CES® , Qualified Intermediary for 1031 Exchanges · McKinney, TX · Member since 2018 · 42 posts · 144 votes
3y
Hello @Jonathan Moonen,

DSTs, as previously stated, are often a good alternative to 1031'ing into something other than physical property. 1031'ing into oil and gas mineral rights could also be an option if they are "1031 friendly". There are certain net worth requirements and minimum investment amounts that you'll want to ask about when looking at different DST and O&G companies and offerings.
You may also want to look into purchasing vacant land as replacement property as well since price points can be less than a house depending on size and location.

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