Investing in Assisted Living Facilities Using 1031 Exchanges

By Thomas P. Roussel | February 4, 2019

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 years.1

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 footsteps.2 The boomer generation is rapidly approaching the age that uses the bulk of healthcare services in our country. As seniors grow old, many move into assisted living facilities to access 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 current real estate investments into assisted living facilities through a 1031 exchange.

Assisted Living Facilities

Assisted living facilities are designed for those who are disabled 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 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.

The rules are fairly straightforward but must be strictly followed to accomplish a successful exchange. For instance, in order to qualify, you must identify the replacement property within 45 days of the sale of your initial property. You also must complete the transaction within 180 days of the sale or sales of your initial properties. 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. These are some basics of the process, for a more detailed view check out The 1031 Exchange Quick Guide.

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. 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.

While we believe assisted living facilities are positioned for growth, this highly specialized asset class must be underwritten properly. Want to learn more about our current senior housing DST? Click Here.

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