Case Study #1 – From “Hands-On” Management to Passive Real Estate Investments
Apartment Sale and 1031 Exchange into Passive Real Estate
A family owned a 33-unit apartment building in La Mesa, CA for more than 20 years. Although they took great pride in the property and kept up on the maintenance and management, it became clear as the parents got older that their adult children were not interested in taking on the full time management when it was their time to retire. The family was also concerned about the increasing expenses of managing the property and the possibility that California could remove the Prop. 13 exemption for apartment owners in the future. After consulting with ACRE and their financial advisors, they determined that their best strategy was to sell the property and utilize the IRS 1031 Exchange Rule to defer their capital gains taxes and re-invest into passive real estate properties, whereby increasing their cash flow and eliminating management responsibilities.
After careful research and planning, ACRE marketed the apartment property and found a qualified investor. While still in escrow, their ACRE team began to search for exchange properties, ultimately selecting and closing on two brand new, corporate-owned 7-11’s and a fully remodeled KFC/Taco Bell. All three properties were absolute triple net properties, which means that for the next 10-30 years the family would enjoy steady increases in cash flow, without the need to worry about unexpected expense increases, rising utility and tax bills, or the cost of making major improvements like painting the exterior or replacing roofs.
As a result, the family now enjoys a stable investment income stream that will increase over time. Ultimately, this investment portfolio will be transferred to their children and grandchildren without concerns regarding proper management, reoccurring maintenance or increased operating costs.