10A — March 15 - 28, 2019 — 1031 Exchange — M id A tlantic

Real Estate Journal


1031 E xchange

By Edward Fernandez, 1031 Crowdfunding, LLC Investing into assisted living facilities using 1031 Exchanges


n recent years, assist- ed living facilities have gained popularity among

steps. 2 The boomer generation is rapidly approaching the age that uses the bulk of healthcare services in our country. As se- niors grow old, many move into assisted living facilities to ac- cess a higher level of care that would otherwise be unavailable at home. In an asset class that could be poised for long-term growth, some investors may be interested in rolling their cur- rent real estate investments into assisted living facilities through a 1031 exchange. Assisted Living Facilities Assisted living facilities are designed for those who are dis- abled or unable to live on their

own. They provide services to assist with activities of daily living (ADL). These services can include anything from bathing, grooming, eating, to managing money or providing medication. The level of care offered from one facility to the next could differ because these are regulated at a state level, not a federal level. Before investing into any asset class, it's key to have a thorough understanding of what you are buying into. While assisted living facilities may seem similar to investing into multifamily, they are actually quite different. When you are

investing in assisted living fa- cilities, you aren't just investing in the real estate, but the oper- ating company tied to the real estate as well. Therefore, the acquisition of assisted living facilities is highly specialized. You are basically underwrit- ing the business operating the facility. It's important that both the acquisition team and the operator both have a high level of expertise in this industry. 1031 Rules The 1031 exchange allows real estate investors to take gains in properties and roll them into another property while deferring their taxes.

That means that even if the in- vestment property you are sell- ing has appreciated in value, you will not have to pay poten- tially massive capital gains tax on your return. The rules are fairly straight- forward but must be strictly followed to accomplish a suc- cessful exchange. For instance, in order to qualify, you must identify the replacement prop- erty within 45 days of the sale of your initial property. You also must complete the transac- tion within 180 days of the sale or sales of your initial proper- ties. During the time that you are identifying the property and closing the sale, the funds should be held in escrow with a qualified intermediary, also known as an accommodator. Utilizing a DST in Your 1031 Exchange A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under Dela- ware statutory law. Investors in a DST own a pro rata inter- est in the trust and have the right to receive distributions from the operation of the trust, either from rental income or from the eventual sale of the property. For the purposes of a 1031 tax-deferred exchange, the purchase of a beneficial interest in a DST is treated as a direct interest in real estate, thus satisfying that require- ment of IRS Revenue Ruling 2004-86. An advantage of DSTs is they are a turn-key solution to a 1031 exchange. There is no need to qualify for the debt on the property, you are simply assigned your pro rata share. The property is already closed, eliminating the closing risk. Another advantage is that in some instances, the real estate is purchased on favorable terms that would be unavailable to the everyday real estate investor. E dw a r d F e r n a n d e z is Founder/CEO of 1031 Crowdfunding, LLC based in Orange County, CA.  1. https://www.institutionalinvestor. com/article/b14z9tcwzg45rc/taking- the-risk-from-longevity-low-rates-and- high-premiums 2. http://www.pewsocialtrends. org/2010/12/20/baby-boomers-ap- proach-65-glumly/ While the information provided above has been researched and is thought to be reasonable and accurate, it's important to understand that all investments, including real estate, are speculative in nature and involve substantial risk of loss. Addition- ally, private placements of securities are not publicly traded, are subject to holding period requirements, and are intended only for accredited investors who do not require a liquid investment.

institutional i n v e s t o r s . We believe impr e s s i ve demographic f undamen - tals will drive the demand for these fa- cilities in the coming years. 1

Edward Fernandez

In 2011, the oldest Baby Boomers began turning 65 years old. For the next 19 years, roughly 10,000 people per day will follow in their foot-

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