Three 1031 Exchange Alternatives

If you are looking for a way to diversify your investments, you may have thought about investing in real estate. At the same time, there are significant taxes you may incur when you buy and sell property. One potential way to defer capital gains taxes on property that may have appreciated in value when you sell it is to use a 1031 exchange. If you have property, you can sell that property and reinvest the proceeds into a replacement property. As a result, you may be able to avoid immediate tax consequences stemming from the transaction.

At the same time, you might be looking for alternatives to a traditional 1031 exchange. Take a look at a few alternatives below, but understand that nothing contained on this website constitutes tax, legal, insurance, or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument.

1. DST 1031 Properties

One option is to take advantage of Delaware Statutory Trust (DST) real estate options. Since a recent IRS Revenue ruling, 2004-86, a properly structured DST 1031 investment includes like-kind property regarding a 1031 exchange. As a result, you may be able to diversify your real estate investments a bit more, taking advantage of different locations and property sectors. If you would rather enjoy time with your friends and family instead of dealing with annoying residents, you might want to take advantage of a DST exchange.

2. Qualified Opportunity Zone Fund

Instead of going with a traditional 1031 exchange, you might want to take a closer look at a Qualified Opportunity Zone Fund. This is a relatively new investment option. You can take the capital gains you have and place them in various real estate Investments, thanks to the Tax Cuts and Jobs Act. If there is a community that is considered economically distressed, you might receive preferential tax treatment by investing in it. If you have a 1031 exchange that has failed, or if you are interested in deferring certain taxes stemming from the sale of a business or stock shares, a Qualified Opportunity Zone Fund could be a suitable option.

3. A 721 Exchange

With a 1031 exchange, you may have a lot of day-to-day tasks that you need to complete. If you don't want to deal with them, or if you are interested in diversifying your investments a bit more, you might want to take a closer look at a 721 exchange. In this exchange, you can take the property you have and exchange it for units in a real estate investment trust, usually shortened to REIT. Before deciding to invest in a REIT, you need to consider whether it is public or private, and you need to think about whether you want to defer your taxes with another exchange down the road. If you invest in a REIT, you might not be able to do this exchange again.

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