1031 exchange to a syndication

[Doug Roux]

My parents have duplexes and triplexes for a total of 50 units. They are in their mid-70s and can no longer manage the properties like they used to. I believe they should do a 1031 exchange into a truly passive investment with monthly income. I was thinking a syndication but I'm not sure if that would qualify for a 1031 exchange. Any suggestions?

[Dave Foster]

@Doug Roux, Yep everyones right.  the 1031 must be a sale of real estate and a purchase of real estate.  So a syndication won't work.  The one exception that is most syndication like as  @Luke Klaiber and @Jay Hovis said  is the Delaware Statutory trust where the SEC and the .IRS have gotten together to decide that owning a membership of the trust qualifies the same as actually having a deeded interest in the real estate (important note - the same tax situation as owning the real estate not the same legal rights).  The options I see my clients utilizing when they're in your parent's situation are:

1. Most frequently a sale of the investment real estate and the purchase of passive NNN properties, DSTs or TICs - The difference is that NNN is usually owned by one one entity and can be a single tenant structure or a multi tenant center. The NNN means that the tenant is responsible for all taxes insurance and maintenance. Leases are typically very long. DSTs own one asset but have many investors in the trust. Typically the DST either manages the asset or it is based on a NNN lease. TIC operates the the same way - one asset but with fewer members and instead of a membership interest in the trust you actually own a tenant in common % of the actual real estate.

2. Future retirement homes or vacation properties - some clients with 1031 into wonderful properties a year or two ahead of retirement.  They use them for investment for a bit and then change the use and move in creating a new primary residence.  They then sell the old primary residence and take that money tax free.  In the case of a vacation rental they'll frequently purchase something and put it into central reservations where it generates passive income and they use it periodically for personal use.

3. Full time property management mentioned by @Jaysen Medhurst  Does eliminate some of the day to day.  But at the end of the day you're still managing something.  And it can become like ripping a band aid off slowly rather than quickly.  Most active management people will actually do better going cold turkey into passive rather than trying to ease into it by slowly lessening their management commitment.  

4. Owner carry as @Daniel Dietz said is a lesser used option but probably in my sphere primarily because once a client has invested years building up deferred taxes they don't like to end up paying at the end if they can help it. The allure of passing it on to their heirs tax free is too great so they explore the options above first.

5.  Opportunity zones/funds - Tempting .  @Tom Ott's right to mention them as an alternativeThey do avoid the need to 1031.  but again untested, no historic performance data, the low hanging fruit is being picked off by syndicators then combining assets into opportunity funds so what kind of performance will come from that is unknown.  These things could be awesome.  But I'd never go into one with a significant amount of money designated for an imminent retirement.