When selling an investment property through a 1031 exchange, one of the biggest decisions is what to buy next.
The good news? Your replacement property doesn't have to look like the property you're selling.
For purposes of a 1031 exchange, "like-kind" refers to the nature or character of the real estate—not its type or quality. That means an investor may have significant flexibility when moving from one type of investment real estate to another, provided the properties meet the applicable requirements.
If you're considering an exchange, here are seven types of replacement properties that may be worth exploring.
1. Single-Family Rental Properties
Single-family rentals remain a familiar option for real estate investors.
An investor selling another type of investment property—such as vacant land or a commercial property—may be able to exchange into one or more single-family rental properties.
This approach may appeal to investors who want properties that are relatively straightforward to understand and have broad rental and resale markets.
2. Multifamily Properties
Duplexes, apartment buildings and other multifamily properties can also potentially serve as replacement properties.
For some investors, multifamily real estate provides an opportunity to consolidate several smaller investments into a single property or potentially diversify rental income across multiple units.
3. Commercial Real Estate
Office, retail, industrial and other qualifying commercial properties may also be options.
For example, an investor selling residential investment property could potentially exchange into commercial real estate. The properties don't have to serve the same purpose to potentially qualify as like-kind real estate.
Consider: Tenant quality, lease terms, vacancy risk, location and the property's long-term business use.
4. Triple-Net Lease Properties
For investors interested in reducing some of the day-to-day responsibilities associated with property ownership, a triple-net, or NNN, property may be worth exploring.
Under many NNN lease structures, the tenant is responsible for expenses such as property taxes, insurance and maintenance, although the specific responsibilities depend on the lease.
This can make NNN properties attractive to investors looking for a potentially more hands-off ownership structure.
5. Delaware Statutory Trusts (DSTs)
A Delaware Statutory Trust allows multiple investors to own beneficial interests in institutional-quality real estate held by the trust.
Certain DST interests may qualify as replacement property in a 1031 exchange, making them another option for investors who want real estate exposure without directly managing an individual property.
DSTs may also be useful when an investor needs to allocate a specific portion of exchange proceeds after identifying other replacement properties.
6. Vacant Land
Investment or business-use land can potentially qualify as replacement property even if the relinquished property contains buildings or produces rental income.
For example, an investor may be able to sell a rental property and acquire qualifying vacant land as part of the exchange.
The key consideration is generally how the property is held—not whether the two properties physically resemble one another.
7. Multiple Replacement Properties
Your replacement property doesn't necessarily have to be one property.
Depending on the exchange, an investor may acquire multiple qualifying replacement properties. That could mean exchanging one larger property for several smaller rentals or diversifying across different properties and markets.
Investors can also potentially move in the opposite direction, selling multiple properties and acquiring a larger replacement property, assuming the transactions are structured appropriately.
Your Next Property Could Look Very Different From Your Last One
A 1031 exchange can be more than a way to replace the property you sold. It can provide an opportunity to reconsider how your real estate portfolio is structured.
Some investors may want more income potential. Others may want less management responsibility, greater diversification, a different market or a different type of real estate altogether.
The important part is planning before the sale.
Once a relinquished property closes, the 1031 exchange timeline moves quickly: investors have 45 days to identify potential replacement property and 180 days to complete the exchange.
Considering selling an investment property? Speak with an Equity 1031 Exchange specialist before closing to discuss your property, timeline and the 1031 exchange process.
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