How to Invest in Assisted Living Facilities With 1031 Exchanges

By Edward E. Fernandez | July 3, 2023

In recent years, assisted living facilities have gained popularity among institutional investors because Baby Boomers — the second largest generation in the United States — are aging. As these older adults age, many will move into assisted living facilities to access a higher level of care that would otherwise be unavailable at home. We believe impressive demographic fundamentals will drive the demand for these facilities in the coming years.

The boomer generation is rapidly approaching the age that uses the bulk of healthcare services in our country. In 2011, the oldest Baby Boomers began turning 65 years old. By 2030, all boomers will be 65 or older.

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 for sale through a 1031 exchange.

What Are Assisted Living Facilities?

Assisted living facilities are designed for those who are disabled or unable to live independently. Units are generally private or semi-private. These facilities also coordinate with the residents’ healthcare providers to ensure each person receives the medical care they need. Assisted living facilities are a type of senior housing, or communities serving long-term residents aged 65 or older.

These communities also provide services to assist with activities of daily living (ADL). These services can include:

  • Toileting
  • Dressing
  • Shopping
  • Bathing
  • Grooming
  • Eating

Assisted living also offers supportive services that can include:

  • Medication
  • Housekeeping
  • Meals
  • Laundry
  • Managing money

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. Investors should understand what assisted living facilities offer before investing in an assisted living facility for sale.

Why Invest in Assisted Living Facilities?

Why Invest in Assisted Living Facilities?

Before investing in 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 in multifamily properties, they are actually quite different.

Assisted living facilities are a strategic option for many investors due to the sector’s many advantages. Reasons to invest include:

  • Growing demand: As the Baby Boomer generation ages, the demand for senior housing will increase.
  • Resiliency: Because the residents rely on the services and amenities these facilities provide, assisted living is a needs-based investment. This factor may protect investments in these facilities as the economy fluctuates.
  • Unique operating circumstances: Assisted living facilities differ from other commercial real estate asset classes. These investments offer a blend of healthcare, service, housing, and hospitality, whereas other asset classes involve only one of these areas.
  • Specialized management: Assisted living requires specialized management teams due to the complex nature of running one of these facilities. When you are investing in assisted living facilities, you are investing in the real estate and the operating company tied to the real estate. You are underwriting the business operating the facility and trusting that they can keep up with strict regulations while attracting residents from local and regional hospitals and healthcare providers. Therefore, the acquisition of assisted living facilities is highly specialized, which is why it’s important that both the acquisition team and the operator have a high level of expertise in this industry. If relationships are made with a professional operator, this creates a barrier to entry, as not everyone has the resources to operate this type of facility.

1031 Rules to Follow

The 1031 exchange allows real estate investors to take gains in properties and roll them into another property while deferring their taxes. This principle means that even if the investment property you are selling has appreciated, you will not have to pay potentially massive capital gains tax on your return.

If you are planning to execute a 1031 exchange involving an assisted living facility, it must meet several criteria to be successful. The rules are fairly straightforward but must be strictly followed. For instance, some 1031 exchange rules include:

  • In order to qualify for tax deferment, you must identify the replacement property within 45 days of the sale of your initial property.
  • You 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 guidelines 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 the Internal Revenue Service (IRS) Revenue Ruling 2004-86.

An advantage of DSTs is they are a turnkey solution for 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 generally already closed, potentially eliminating the closing risk. Another advantage is that, in some instances, the real estate is purchased for a favorable cost, which is beneficial since the everyday real estate investor cannot pay for a multimillion-dollar investment property.

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

Learn More About Assisted Living Real Estate Exchanges With 1031 Crowdfunding

Assisted living facilities can be a strategic investment in a resilient and high-demand investment class. 1031 Crowdfunding can assist in your 1031 exchange process involving these properties. We offer personalized support and decades of experience to make the process compliant, efficient, and convenient.

Start investing in assisted living real estate by registering online or viewing our 1031 exchange property listings today.

 

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.

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