Using a 1031 Exchange in Senior Housing

1. The basics of a 1031 exchange

Section 1031 of the Internal Revenue Code allows an investor to defer recognizing gain when real property held for investment or business use is exchanged for other "like-kind" real property. Since 2018, only real property qualifies; personal property and business assets do not.

Most exchanges are "delayed" exchanges handled through a qualified intermediary, who holds the sale proceeds so the seller never takes possession of them.

2. The deadlines that matter

• 45 days: from the sale of the relinquished property, you must identify potential replacement properties in writing.
• 180 days: you must close on the replacement property within 180 days of the sale (or by your tax return due date, if earlier).

These deadlines are strict. In senior housing, where licensing approvals and lender reviews can take months, it is wise to start looking for replacement properties before the sale closes.

3. Real estate versus the operating business

An assisted living sale usually includes the land and building, furniture and equipment, and the going-concern business (goodwill, contracts, and workforce). Only the real property portion is eligible for 1031 treatment. The purchase price is typically allocated among these categories in the purchase agreement, and that allocation affects how much gain can be deferred.

Because the allocation has tax consequences for both sides, it should be negotiated with your CPA involved, not left to the end of the deal.

4. Structures to discuss with your advisors

• OpCo/PropCo: some owners hold the real estate in one entity and the operating business in another, which can make the real estate portion of a sale cleaner to exchange.
• Exchanging into a different property type: like-kind is broad for real estate, so senior housing can be exchanged for other investment real estate, and vice versa.
• Delaware Statutory Trusts (DSTs): some investors use fractional interests in professionally managed real estate as replacement property.
• Reverse and improvement exchanges: more complex options when the replacement property must be acquired first or improved.

5. Common pitfalls

• Taking control of sale proceeds, even briefly, which can disqualify the exchange.
• Identifying too few properties and losing the only candidate during diligence.
• Receiving cash or debt relief ("boot") that becomes taxable.
• Underestimating how long a licensing change of ownership will take on the replacement asset.

6. Where to go from here

Engage a qualified intermediary and a CPA experienced in exchanges before you sign a purchase agreement. To see potential replacement properties, browse our current listings, and see how assisted living facilities are valued.

This article is general information from Haven Senior Investments. It is not legal, tax, or investment advice. Rules and market conditions vary by state and change over time; confirm specifics with your attorney, CPA, and lender.