Are you a landlord that wants to expand or change your business into new areas? If so, a like-kind exchange could be your ticket to a new market or a new way of operating your rental business. How can a like-kind exchange spur change? Here are three ways to do just that.
1. Exchange Properties for New Types
Tax-delayed like-kind exchanges — where you sell one rental property and purchase a replacement one within the allotted time to avoid capital gains taxes — are useful for landlords who want to pursue new opportunities. This is because the IRS definition of 'like-kind' is very broad, meaning you can exchange residential property for commercial, single-family homes for multi-unit ones, and rural land for city property.
Very few rental properties do not fall under a 'like-kind' description. You generally cannot include property purchased simply for resale ('house flipping') or for personal use. But a landlord could include a property kept partially for personal use — such as a duplex — with the proper division when reporting.
2. Reduce Workload With a Trust
One excellent strategy to use a like-kind exchange for diversification involves a DST 1031 trust. These real estate trusts turn active portfolios into passive portfolios while still fitting the category of a like-kind exchange.
By putting some proceeds into such a trust, you can reduce your current workload — getting rid of maintenance, repairs, tenant communication, and even eviction efforts — without reducing your investment or profits. Then, put the additional effort into finding the right new type of rental property, remodeling or updating it, and getting it on a permanently profitable path.
3. Use Exchange Vehicles to Gain Time
Unfortunately, the like-kind exchange rules have a limited window of opportunity. You have only 45 days to identify replacement properties, for instance, and 180 days to complete the purchase. A landlord entering a new phase of business may not be able to accomplish all this in a rush. Instead, use a passive DST 1031 trust to 'park' your profits so you can ensure that you buy the right property at the right time.
Which of these strategies could help you diversify or grow your landlord portfolio? Whether you use tax vehicles like a DST 1031 for a long or short period or you invest directly into new types of real estate, the effort can help keep your work profitable for years to come. For more information about rental property 1031 tax delayed exchanges, contact a local professional.