While owning an investment property is pleasure, maintaining it could be a pain. Real estate investors often complain about the challenges they face in managing their properties. Due to increasing expenses and effort, it gets difficult for investors to look after their properties after some time. As a result, many investors choose to sell their assets without recognizing the financial losses. If you also find yourself in the same situation and don’t want to continue with property management, you can do a 1031 exchange on your asset and get rid of property management.

A 1031 Exchange Lets Investors Trade An Old Investment Property For A New Asset.

A 1031 exchange, also known as a ‘like-kind’ exchange, lets you trade your investment property for another ‘like-kind’ property and defer capital gain taxes. Generally, when you sell a property, you are liable to pay capital gain taxes imposed by the state and federal government. However, using a 1031 exchange, you can avoid the taxes on the property sale. To qualify for a 1031 exchange, you must abide by the rules established by the IRS. Here are a few of these rules:

  • Both the relinquished and replacement properties must be like-kind.
  • Properties involved in a 1031 exchange must be held for use in trade, business, or for investment.
  • Both the relinquished and replacement properties must be of the same value.
  • A 1031 exchange investor must complete property identification in 45 days, whereas the exchange must be completed within 180 days.

Besides these, there are a few other rules that the IRS requires you to follow. The biggest advantage of doing a 1031 exchange is that you can invest in any property. For example, if you own a multi-family apartment, using a 1031 exchange, you can trade it for a retail shop or an industrial property. Similarly, you can invest in NNN properties and get rid of property management.

A NNN Lease Provides Relief From Property Management.

A NNN or triple-net lease is a single-tenant arrangement that requires the tenant to pay all major operating expenses associated with the property they have rented. These operating expenses include insurance, property taxes, and maintenance cost. Using a 1031 exchange, you can sell your investment property and invest the proceeds into a NNN property. You can obtain a list of NNN 1031 exchange properties from the office of a local broker or a real estate firm. It is a great way to get rid of property management and, at the same time, avoid capital gain taxes.

You can also invest in TIC or Tenancy-in-common to enjoy the same benefits. A TIC agreement lets you co-own a big investment property along with other investors. A TIC works on the same module as DSTs. The only difference is that a TIC can only have up to 35 investors, whereas DSTs have more than a hundred investors. However, irrespective of what you choose, you must speak to your advisor first. Seeking assistance from your advisor or a 1031 expert can help in minimizing potential risks.


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