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1031 Replacement Property Alternatives

There are four kinds of replacement properties for real estate 1031 exchanges: traditional properties, whole ownership triple net (NNN) properties, Delaware Statutory Trust (DST) properties and 1031 qualified oil & gas interests.

Traditional Properties

Traditional properties are the typical rental properties and vacant land that you can find on your own or with the help of your real estate broker. Small traditional properties (price range from $200,000 to $1 million) include a rental house, condo or duplex, a small industrial building, a vacant lot or small tract of land, etc. Mid-size traditional properties (price range between $1 million and $5 million) include small apartment buildings, strip shopping centers, small office buildings, multi-tenant industrial and warehouse buildings, larger tracts of vacant land, etc. Large traditional properties (price range of $5 million and up) include larger versions of the mid-size buildings such as shopping centers and office buildings with multiple tenants, farms, ranches, mobile home parks, large apartment complexes, etc.

Local real estate brokers normally assist people to find small and mid-size traditional properties, and national commercial brokerages usually assist people to find larger traditional properties.

Triple Net (NNN) Properties

NNN properties consist of drug stores, fast food restaurants, auto parts stores, etc. There are more than 100 companies in the U.S. who constantly build new restaurants, drug stores, etc. and then sell them off to investors—these companies want to use their funds for their core business development and do not want their funds tied up in real estate. Certain national and regional real estate brokers maintain lists of available properties.

For many years, NNN properties have been popular with investors, including 1031 exchangers, who want passive income and no tenant hassles. Of course, for 1031 exchangers, there is also the capital gains tax savings motivation. Whole ownership means that there is normally only one owner of a NNN property, i.e., an individual, a corporation, a living trust, an LLC, a family or other limited partnership, a general partnership, etc. These properties are what are called “sale and leaseback” which means the company sells the location to an investor and then leases it back, for periods as long as 25 years. NNN means that the tenant takes care of all maintenance, repairs, replacements, insurance and taxes. NNN property owners normally receive monthly rent payment checks from the tenant. The minimum investment for NNNs is about $1 million, but can sometimes exceed $20 million.

  • Institutional Quality Real Estate
  • Management Free
  • Property Owner Control
  • High Credit Tenants
  • High Amount of Equity Required for Purchase
  • Recourse Financing
  • Lender Approval or Prequalification for Mortgage
  • Stabilized Properties

Delaware Statutory Trust (DST) Properties

DSTs were approved by IRS as 1031 replacement properties in 2004, and they have become very popular. Unlike whole ownership properties that have only one owner, DST properties have multiple owners. Each DST owner owns a percentage of the property, usually an apartment complex, shopping center, office building or industrial property; and sometimes a hotel, student housing at a university, a senior housing complex. Investors receive all the benefits of property ownership without the hassles and headaches of property management. Investors participate in the net income and appreciation generated by the property as well as tax benefits from depreciation. The minimum investment for DSTs is about $100,000.

  • Institutional Quality Real Estate
  • Management Free
  • High Credit Tenants
  • Low Minimum Investment Amounts Allowing for Diversification of Equity
  • Non-Recourse Financing
  • No Lender Approval or Pre-Qualification for Mortgage
  • In-Place Professional Management
  • Stabilized Properties

Investment income (cash flow) and property appreciation are not guaranteed, there is potential for loss of principal invested and DST investments are generally illiquid.

Oil & Gas Interests

1031 exchange qualified oil & gas interests are usually royalty or working interests in operating oil and gas wells. These, like NNN properties and DSTs, are passive income generators. However, instead of depreciation deductions, the tax write offs come from depletion allowance. Both depreciation on NNNs and DSTs and the depletion allowance for oil & gas cause some of the cash flow to be tax free. The minimum investment for 1031 qualified oil & gas is about $100,000. However, oil & gas investments are generally illiquid and involve significant risks, including possible loss of principal invested, and the income from such investments is not guaranteed.