INVESTING IN ASSISTED LIVING FACILITIES USING 1031 EXCHANGES

In recent years, assisted living facilities have gained popularity among institutional investors. We believe impressive demographic fundamentals will drive the demand for these facilities in the coming year.

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 facilities, you aren’t just investing in the real estate, but the operating company tied to the real estate as well. Therefore the acquisition of assisted living facilities is highly specialized. You are basically underwriting 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 investment property you are selling has appreciated in value, you will not have to pay potentially massive capital gains tax on your return.

Utilizing a DST in Your 1031 Exchange

A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under Delaware statutory law. Investors in a DST own a pro rata interest 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 requirement of IRS Revenue Ruling 2004-86.

An advantage of DSTs is they are a turn-key solution to a 1031 exchange

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.

 

reference:

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-approach-65-glumly/

 

 

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