Solutions to Finding Replacement Property in a Competitive Real Estate Market

Passive Real Estate Investments for Replacement Property

When traditional replacement property is hard to come by many taxpayers look toward passive investment options to complete their 1031 exchange. Some common examples of passive replacement property options in 1031 exchanges include:

DSTs (Delaware Statutory Trusts)

A DST is a real estate investment vehicle that provides investors with access to investment grade real estate that is generally larger than they could have acquired on their own. Through a DST the (“Exchangor" or "Exchanger") Individual or entity desiring an exchange. Taxpayer acquires a fractional interest in a property equal to the (“Exchangor" or "Exchanger") Individual or entity desiring an exchange. Taxpayer ’s equity investment.

DSTs allow for diversification of a real estate investment portfolio and eliminate the headaches involved in traditional real estate ownership, the so-called “Three-Ts: Toilets, Tenants and Trash”. DSTs are increasingly popular with seasoned real estate investors that are looking to change their active real estate investment into passive real estate investments, allowing them to retire from property management responsibilities.

This type of investment is intended to provide reliable income with no property management. Also, when the property as a whole is sold (5-7 years typically) the investor also shares pro rata in the increased value, in addition to the quarterly income having been received along the way.

Passive Ownership Through 3rd Party

For taxpayers that want traditional ownership of real property with all of the benefits that come with passive investments, Doorvest provides the perfect solution.

Doorvest facilitates the purchase of an investment home remotely and helps the taxpayer generate passive income from day one of closing. They also manage the property, making owning rentals much easier and you still have full ownership of the rental home. Doorvest also allows you to acquire replacement property anywhere in the following markets, entirely online so your property options are more expansive than just your local market.

Experience the Doorvest Process

Consider a Different Type of Exchange

The other solutions available if you are facing difficultly finding replacement property is to structure your exchange as either a Reverse Exchange, also known as Parking Exchange or as an Improvement or This refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to cause improvements to be placed on the land constituting the replacement property so that the taxpayer can complete the trade where both the value of the land and of the improvements will count for the amount the taxpayer traded for. These types of exchanges are structured pursuant to IRS Rev. Proc. 2000-37 and are sometimes known as “property parking exchanges” and are sometimes known as “property parking exchanges” and require the exchange facilitator to take on an additional role as a Qualified Exchange Accommodation Titleholder. Build-to-Suit Exchange , also known as a Construction Exchange.

Reverse Exchanges

In situations where the taxpayer wishes to acquire their replacement property prior to the sale of their relinquished property, to ensure they do not lose out on the replacement property, a A Reverse Exchange is typically conducted under the safe harbor established in Rev Proc 2000-37. These are "parking arrangements" where either: (i) a property is purchased and "parked" as a potential replacement property for the benefit of a specific taxpayer by an exchange accommodation title holder until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange; or (ii) a taxpayer transfers the relinquished property to be "parked" by an exchange accommodation title holder in exchange for immediately receiving the replacement property, and the exchange accommodation title holder later transfers the relinquished property to the ultimate transferee Reverse Exchange is recommended.

Learn more about the Reverse Exchange process.

Build-to-Suit or Improvement Exchanges

Build-to-Suit, also known as Construction-to-Suit or This refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to cause improvements to be added to the improvements already on the replacement property so that the taxpayer can complete the trade where both the value of the land and of the enhanced improvements will count for the amount the taxpayer traded for. For example a taxpayer may put in new heating, ventilating, air conditioning, roof and windows on the property. These types of exchanges are structured pursuant to IRS Rev. Proc. 2000-37 and are sometimes known as “property parking exchanges” and require the exchange facilitator to take on an additional role as a Qualified Exchange Accommodation Titleholder. Improvement Exchange s allow the taxpayer to put exchange funds toward the cost of improvement to the replacement property. These types of exchanges provide the taxpayer with more options for their replacement property because they can use the funds to turn the property into the right fit, they don't have to find the perfect fit as-is.

Learn more about Build-to-Suit/Improvement Exchanges.

Whether you decide to identify passive investments for your replacement property or decide on one of the other types of 1031 exchanges, these available solutions will help you successfully complete your 1031 exchange in even the toughest real estate markets.