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Self-Storage Investment Property

Published on: January 6, 2022

In many cases, investors who are involved in the world of 1031 exchange investment properties are diversifying their interests and investing in multiple property types. At 1031 Exchange Place, we’re here to do more than provide intermediary services. In addition to helping you carry out your 1031 tax deferred exchanges, we’re also here to offer expertise on the world of 1031 replacement properties. Here we’ll go over one kind of investment that’s been blowing up over the last few years: self-storage.

The Basic Numbers

Also called mini-warehouses, this industry skyrocketed in 2017, going six straight months setting records for construction spending at one point. The industry’s largest player, Public Storage, created over $500 million in revenue just in the first quarter of 2017, with fantastic margins (more on this in a bit).

Roots of the Trend

How did this come to be? Well, you can actually trace this trend back to the US financial crisis that began roughly a decade ago – by the end of this crisis, funding for new construction was basically impossible to find. There’s still a backlog from this period, in fact.

At the same time, though, investors found that those assets continued to perform well during the recession. Storage centers became a great hedge against similar future issues.

Low Costs, High Demand

Part of the major benefit of these kinds of facilities is how easy they are to manage. They’re very cheap to build, plus require incredibly low staffing demands compared to other buildings of a similar size. This leads to fantastic margins: Remember that half-billion-plus profit we noted for Public Storage earlier? They booked that despite just $149 million in operating costs, for a margin of nearly 75 percent.

The resulting popularity of these investments has grown so much that even some local governments are taking notice. Places like New York and Los Angeles have attempted to limit new self-storage construction projects, with concerns that this industry is using up too much of the available real estate that’s needed for other industries that create more jobs.

In some cases, big venture firms are taking things even further and offering services beyond just self-storage. We’re talking about areas like moving items to and from warehouses, posting photographs online, and related services.


Some of the largest players in this space, while still excited about the profits they’re seeing, have advised caution in certain areas. They’re forecasting decreases in consumer spending that will result in less need for storage space.

But with a large percentage of this market controlled by smaller or single owners, this building increase might not slow down anytime soon. Such owners are less concerned about diluting the market, and occupancy rates at self-storage facilities across the country are still very high.

If you’re a 1031 exchange property investor looking to manage self-storage investments for your exchange, speak to one of our advisors at 1031 Exchange Place. We can show you the latest self-storage DST deals.

In a standard 1031 tax-deferred exchange, a basic requirement involves the sale and purchase of “like-kind” properties – a property held for investment are considered like-kind with another property held for investment, to put it simply. The most common form of ownership is fee simple interest. There are other forms of ownership that can be used in exchange, however. One such other option is called a leasehold interest, which refers to a temporary right to occupy land or property. Let’s look at some of the different leasehold interest situations that can be used in an exchange.

Short-Term Leasehold Interests

IRS regulations state that the 30-year mark is a significant one for leasehold interests – namely, a leasehold interest of 30 years or longer is like-kind with fee-simple real estate, while leasehold interests under 30 years are not. That said, sub-30-year leasehold investments may still be like-kind with other short-term leasehold interests, and the IRS has allowed this in many cases.

While this will indeed be approved at times, the IRS has not given specific guidelines on how this process works or how similar leasehold interests have to be to qualify as like-kind. Approvals may vary based on year numbers and other details.

Long-Term Leasehold Interests

For lease terms of at least 30 years, the options tend to open up. As it turns out, these requirements are even more liberal than they appear up front: IRS rulings have shown those option renewal periods will be included in determining leasehold interest length. So if you only have a 15-year initial term, but you also hold three five-year renewal options, the lease will be viewed as a 30-year lease in regards to a 1031 exchange.


There’s another situation where leasehold interests can be used in exchanges: When improvements are being made. If you’re looking to construct a replacement property on the ground owned by a third party, you can defer capital gains in this exchange if the improvements themselves equal or surpass the value of the relinquished property sale (this must take place at or before the standard 180-day acquisition period).

When the relinquished property is sold under this format, an accommodation titleholder (AT) works on behalf of the taxpayer and enters into the leasehold agreement. They use all sale proceeds to construct improvements. Once these are done and the 180-day acquisition period has passed, the AT transfers the interest to the taxpayer via a qualified intermediary.

It’s also possible to use this technique on the ground you already own or ground you control through a related party. Once again, a 30-year or longer lease is important. There are a lot of complicated tax issues involved in this kind of improvement, so we suggest consulting with your tax/legal advisor if you’re considering this type of exchange.

Are you looking to buy or sell a vacation home using a 1031 tax-deferred exchange? The advisors at 1031 Exchange Place are here to tell you that this is often possible, but whether or not it works for you will depend on a few important factors.

In essence, the question comes down to this: Has the property been for personal use, or for investment purposes? Let’s go over the ins and outs that matter here.

Personal Use Basics and Definitions

To perform a 1031 exchange on a property, both properties – the relinquished one and the replacement – must be used for investment purposes, or for use in a trade or business. How does this work for vacation homes, which may have varying levels of use?

Essentially, this ends up speaking to whether any investment intentions were or will be carried out with the properties in question. Know that personal use extends not only to you as a taxpayer, but also to your family members, others with interest in the unit (and their families), anyone using the unit while you live elsewhere (even if you don’t charge rent), or even anyone at all if you’re renting the property for less than fair market value.

How much can I use for a vacation property?

In order for a rental property to qualify for a 1031 exchange, the exchangor cannot occupy the property for more than 14 days per year.

Appreciation, Not Investment

While some taxpayers here have hoped to be approved for this kind of exchange by simply establishing the expectation of appreciation on the property, this generally isn’t enough. No attempt to rent, no deductions claimed for maintenance or depreciation, and other factors might show signs that don’t line up with investment intent.

IRS Safe Harbor

IRS Revenue Procedure 2008-16 provides what’s called safe harbor, meaning that the IRS will not challenge whether a property qualifies as an investment if the right procedures are followed using like-kind exchanges. There are ways to achieve these exchanges outside the safe harbor procedure, but you’ll generally be looked at more closely by the IRS. Requirements for meeting safe harbor are as follows:

  • Meeting ownership requirements
  • Limiting personal use of the property to whichever is greater – 14 days per year or 10 percent of the rental period
  • Rental to an unrelated party for at least 14 days per year
  • Treating the property as an investment – maintaining it, deducting maintenance and depreciation expenses, paying utilities and insurance, and more. For those with a mortgage on the property, ensure it’s an investment loan and not a primary residence mortgage – this will get you disqualified.

How Properties Qualify

The guidelines for both relinquished and replacement properties are as follows:

  • All properties must have been owned by the investor for two years directly preceding the exchange.
  • In each of the two consecutive years before the exchange, the investor must both rent the property for at least 14 days at fair market value and avoid using the property for personal use for either 14 days or 10 percent of the rental period, whichever is greater. Again, remember that personal use includes family members and other individuals, not just you.

For more on the rules for exchanging vacation properties, or to learn about any of our 1031 exchange services or properties available, speak to an advisor at 1031 Exchange Place today.

In part one of this two-part blog series, we went over some of the basics of performing a 1031 exchange with a related party. These exchanges, which define related parties under sections 267(b) and 707(b) of the US tax code, can often be done – but they will generally come with restrictions that you need to navigate around.

At 1031 Exchange Place, we’re here to help. In part two of this series, let’s look at a couple of other examples of related party exchange types, plus some basic exceptions to rules we’ve discussed throughout the series.

Related Party Sales

Much of the discussion when doing an exchange where you sell to your related party involves the use of an intermediary. Both court rulings and the IRS code maintain that using intermediaries does not remove any restrictions on these exchanges, however – this used to be an avenue some folks explored to try and avoid such restrictions.

That doesn’t mean you can’t perform this kind of exchange at all, however. Like with swaps, it’s generally recommended that both you and your related party hold your new property for at least two years, though there are exceptions here that we’ll discuss below. There are often situations where this two-year restriction can be avoided.

Related Party Purchases
Most of the time, courts or the IRS do not allow exchanges where you buy from a related party, then sell to an unrelated one using an intermediary. This is due to basis shifting, which we discussed in part one of this blog. There are still very limited situations where you can perform such an exchange, though, such as if the related party is also performing an exchange with their own unrelated party.

Various Exceptions

There are several exceptions to the areas we’ve discussed in this series:

  • Death: Parties are allowed to dispose of properties before the end of the two-year holding period if either the taxpayer or related party dies during this period.
  • Involuntary conversion: If either property is subject to this during the two-year holding period, the parties will not be taxed.
  • Not for avoidance: If it can be established that your primary purpose is not to avoid Federal income tax, trading with related parties will be allowed. This is also called the non-tax avoidance exception,” which our advisors can explain in more detail.

For more on related party exchanges, or to find out about any of our 1031 exchange services or properties available, speak to the advisors at 1031 Exchange Place today.

When it comes to the 1031 exchange world, there are extra rules that come into play when you’re considering an exchange with any party or entity that’s related to you. Certain restrictions here might prevent these exchanges altogether in some cases, and in others, they may require a replacement property to be held for a two-year 1031 exchange holding period.

At 1031 Exchange Place, we can help you navigate the rules for exchanging property with a related party. Here are some basics to know in what will be a two-part educational blog.

Related Party Exchange Basics

Firstly, let’s define a related party exchange: When any taxpayer performs a 1031 exchange with any party or entity that’s considered related under the US tax code. This includes spouses, siblings, ancestors, and direct lineal descendants, per Sections 267(b) and 707(b) of the Internal Revenue Code, but it also includes any corporation or partnership in which you own at least 50 percent interest. Check both sections above to confirm whether you’re considered related, as there are several possible unique situations they cover.

For many years, it was possible to complete a related party exchange without any restrictions. However, in 1989, the IRC was changed as part of an effort to rid “basis shifting” from the industry, a practice where people traded low-basis properties with high-basis ones using a relation, eliminating or heavily reducing capital gains taxes on the low-basis property.

So Can I Exchange?

Well, it depends on what you’re trying to do in the exchange. Our next section and our follow-up blog will focus on the kind of exchange you’re looking for and restrictions or exceptions that might play a role.

Related Party Swaps

In cases where you are relinquishing your property to a related party, then acquiring your replacement property from that same related party, these kinds of swaps will be allowed – as long as both sides of the exchange hold their acquired properties for at least two years after the final exchange transfer. Your exchange will be immediately disqualified if either party transfers the property before this, requiring both of you to pay taxes on any gains. We’ll discuss a couple of exceptions here in part two of this blog.

For more on related party exchanges, or to learn about any of our 1031 exchange properties or services, speak to an advisor at 1031 Exchange Place today.

At 1031 Exchange Place, one of the most common questions we get as we provide comprehensive 1031 exchange services is this: I want exchange benefits, but my business partners want to cash out – what can I do? Can I do a 1031 exchange in a partnership?

In short, the answer is often ‘yes’ – using a procedure called the “Drop and Swap.” However, there are some important requirements that need to be understood.

Two Vital Requirements

  • It’s not directly stated in section 1031 of the tax code, but there’s a general rule that in order for these exchange transactions to count as ‘like kind’, the same person who sells the property is required to be the one who replaces it as well. Along similar lines, whoever holds the title for the relinquished property must be on the title for the new one.
  • In addition, per IRS Section 1031(a)(2)(D), interests in partnerships are not exchangeable – as such, the interest has to be transitioned to a tenant in common interest before a 1031 exchange can take place.

When It Gets Complicated

This is simple enough in some cases, but in others, it can get a bit complex. If you’re part of an LLC, partnership, or trust where other members are looking to cash out but you or other parties in the arrangement want to use a 1031 exchange to defer capital gains, the most common technique here is the “Drop and Swap.”

During a Drop and Swap transaction, you’re basically “dropping” yourself from your partnership – instead, it becomes a tenants in common relationship with your partners. From there, you then “swap” into a replacement property. In essence, the Drop and Swap changes the property title in this partnership, removing individual names to achieve the transfer.

Using an Example

To understand how this works, let’s look at a basic example. Let’s say you’re one of four members in an LLC that own a pro-rata share of a commercial building. As a group, the LLC is considering selling the property within the next year – for simplicity, we’ll say the asking price is $1,000,000.

The other three members of the LLC are looking to pay taxes and receive net sales proceeds on the sale – but in your case, you want to put your portion toward another investment property using a 1031 exchange. Here are some important factors in your Drop and Swap transaction:

  • Timing: It’s possible to try a Drop and Swap right before the 1031 exchange, but doing so increases your risk of an IRS audit – as such, the earlier the better here. Doing this at least one year in advance of the closing of a replacement property is the general recommendation. Please note that there are no officially established timelines determined by the IRS.
  • Filing an election: After the transition has been made from LLC to tenants in common, and while waiting for the property to be sold, you will file a Section 761(a) election. This is a notification to the IRS that you and your former LLC partners (now tenants in common) do not want to be taxed as a partnership.
  • Periodic payments: If possible, to help provide a pattern that proves you are no longer partners and are instead tenants in common, make regular payments of operating expenses.
  • Negotiate as individuals: Negotiate and engage the sale agreement as individuals, not partners. This will allow the person pursuing the 1031 exchange to do so with their percentage interest of the net sales proceeds applied to their sale.

This can be a complex process, and you want 1031 exchange advisors on your side. We invite you to contact us at 1031 Exchange Place – we’d love to help!

Many of the questions we often get revolve around cash and debt requirements in an exchange: can I pull some cash out of my exchange proceeds of the deal to pay off a debt or to buy a boat? Or many exchangors aren’t initially aware that in order to defer all capital gains, after paying off their relinquished property’s mortgage with the sales proceeds, they’re required to replace it with a loan of equal or more value. Any cash removed or debt not replaced is referred to as “boot”. The following will review boot in more detail to ensure you’re able to make informed decisions when considering replacement property and what you do with sales proceeds altogether.

Equity and Mortgage Boot Basics

One important 1031 exchange rule states that equity and debt for the replacement property being used must be equal to or greater than said equity and debt in the relinquished property. Net equity on a settlement statement (or cash due seller) results from the gross selling price minus retired or paid-off debt, selling expenses, sales commissions, and closing costs.

If a replacement property of at least the same net equity value is not purchased, the result will be a taxable gain. Again, this difference is called “boot,” a benefit that sellers receive either in cash or equity or as a reduction in debt or a mortgage boot. It’s important to know that additional cash is allowed to offset debt here, but additional debt does not offset cash.


Using a basic example, let’s say you are selling a property for $200,000, less debt of $50,000, and selling expenses of $15,000. This leaves you with net equity of $135,000 – this plus your debt amount ($50,000) combine to dictate that a replacement property worth at least $185,000 must be acquired to avoid any taxable boot. Any cash you don’t re-invest will be taxable. The balance of $50,000+ must either be by way of a mortgage – or additional, outside cash may be invested to offset some (or all) of the debt requirement.

Napkin Test

This is a simple test – one that can be done on the back of a napkin, hence the name – that will help you determine the debt and equity areas for both sides of the sale and replacement purchase. Simply line up the sales price, debt, selling expenses, and resulting final equity for the relinquished property on one side, then the purchase price, debt, purchase expenses, and resulting net equity on the other.

Partial Exchanges

If net equity or debt is not replaced with the new property, it’s possible to use a partial 1031 exchange. However, once the replacement reaches a point where it’s at 50 percent of the net selling price of the relinquished property, the tax paid on the boot might actually equal taxes triggered without an exchange. Speak to our advisors and your CPA about whether a partial exchange makes sense given your situation.

For more on how a boot might be used in a 1031 exchange, either via cash proceeds or a reduction in debt or a mortgage, speak to our advisors at 1031 Exchange Place today.

In part one of this two-part blog series, we went over some of the basics of TIC investments and their benefits as TIC 1031 exchanges. As it turns out, the list of benefits is so long that we needed to extend it to this space.

TIC, or tenancy-in-common investments, refer to real estate that is co-owned by multiple investors. Here are some more potential financial benefits to using this kind of exchange.

Tax Returns and Depreciation

Just like with other forms of real estate ownership, depreciation is something that can be claimed against income on a tax return. Sheltering income is another benefit to investing in real estate over other investment options.

Capital Appreciation

On the flip side, if your property appreciates while you own it, you’ll receive your share on a pro-rata basis if the property is eventually sold. This kind of appreciation contributes to the overall ROI you can expect for your real estate investment.

Consistent Income

With TIC investments, the tenant corporation involved in your purchase will guarantee lease payments to property owners throughout the lease. With no hassle or inconvenience, these funds are simply deposited into your bank account via direct deposit on a monthly basis. Rents are pre-negotiated and disclosed in the lease – providing 10-15 years of predictable income.

Limited Fees and Expenses

In most cases, TIC investments and properties will come with almost no fees or expenses. Closing costs are generally not included, and you can get a prorated rent check sent to you on the same day you sign your agreement. There are also major savings typically offered through limiting appraisals and other basic investment costs.

Convenience and Availability

Our 1031 Exchange Place advisors can put you in front of TIC inventory options. For this reason, TICs are incredibly convenient to acquire – some investors use them as a backup replacement property option in case they have their first choices fall through.

In addition, TIC investments that fall under the Real Estate category – rather than securitized TICs or DST investments – are available to everyone. Those other types are generally restricted only to accredited investors, but that’s not an issue in this case.

For more on TIC 1031 exchanges, or to learn more about any of our 1031 tax exchange services, speak to the pros at 1031 Exchange Place today.

For those searching for this attractive 1031 option, 1031 Exchange Place, can help connect them with a selection of properties for TIC 1031 exchanges. Here are some basics on these, and some of the benefits they may offer you.

TIC Basics

A TIC investment refers to any real estate that is co-owned by multiple investors. TIC investments fall under like-kind rules of tax code section 1031 due to the fact that the taxpayer holds a deed to the property deemed tenant-in-common.

In many cases, TIC investments are best for regular exchangers who own rental properties but no longer wish to manage them. These investments generally bring long-term leases and secure investments from large tenants.

Access Benefits

TIC investments have low investment minimums – as low as $50,000 in most cases. This makes 1031 and cash buyers open to high-quality NNN properties that might not have been available to people in this price range in the past – only larger investors would have been able to take advantage, but this is no longer the case. Additionally, unlike the DST format that has grown in popularity, TIC properties are available to non-accredited investors.

Freedom from Day-to-Day Management

As we noted above, the TIC investment is often great for property owners who do not wish to manage their rental properties. NNN lease structures can be combined with third-party property management easily, allowing you as an investor to focus on life outside your investment.


Many investors are easily able to purchase more than one TIC property at a time, what with investment minimums so low. This can help you diversify your exchange.

Location Benefits

In most cases, TIC sponsors are real estate professionals with a long track record in the field. These professionals have a great personal interest in the businesses leasing their properties and finding success – they want the real estate to appreciate, of course. As such, you’ll generally find fantastic locations within TIC investments.

Great for IRA/401k

Many aren’t aware that properties like TICs are a great fit for retirement monies like a self-directing IRA. With current low-interest rates and the volatility of the stock market, TICs are a popular choice for those wanting to receive a consistent return with their retirement.

For more on the benefits of TIC exchanges, or to learn about any of our 1031 exchange services, speak to the advisors at 1031 Exchange Place today.

In part one of this two-part blog series, we went over some of the most common misconceptions out there regarding the 1031 exchange process. As professionals dedicated to our field, we at 1031 Exchange Place are committed to informing our clients – including debunking these myths and getting you on the right track.

In part two of our series, we’ll look at a few more of these unfortunate misconceptions. Here are a few regarding rolling over and reinvesting your 1031 exchange funds, who these exchanges are for, and some issues with the 1031 exchange holding period.

I can simply file IRS Form 8824 to rollover

Some falsely assume that as part of the exchange process, all you have to do to roll over your exchange proceeds into a new investment of some sort and file Form 8824 with the IRS. This is not all that goes into a valid exchange – you need proper structuring, otherwise, you might accidentally trigger a clause or event that ruins your exchange and causes additional tax payments.

Reinvesting Funds

Exchangors often think that you are not required to reinvest all funds from a relinquished property. Beware that some of your tax benefits will evaporate if you choose to reinvest only a portion of your proceeds as part of your exchange – any funds not reinvested in the replacement property are considered “boot,” and are considered taxable income.

“1031 Exchanges are only for…”

There are a couple of misconceptions that begin with this phrase, the first of which is that “1031 exchanges are only for…real estate”. While real estate exchanges are our focus here at 1031 Exchange Place, in reality, both personal and real property, can potentially qualify for tax-deferred status if it’s held for productive use in a trade, business, or for investment. Update: as of the tax reform at the end of 2017, personal property is no longer eligible for 1031 exchange – not much help to the confusion!

In addition, some believe that “1031 exchanges are only for big investors with large profits.” This is not true – anyone who owns an investment property that is being sold for a profit can qualify and should consider such an exchange when selling.

Holding Misconceptions

The 1031 exchange holding period also comes with a common myth: You have to hold the property for a year or more before exchanging it. There are no such requirements under 1031 regulations, though as we noted above, the property does need to be held for productive use in a trade, business, or for investment.

To clear up any other 1031 exchange questions or misconceptions, or to learn about any of our related services, speak to an advisor at 1031 Exchange Place today.


Authored By:

1031 Investment Advisor

Nate oversees the daily operations, business development, and strategy for 1031 Exchange Place. He became interested in real estate from a young age due to his father's influence. After earning his real estate license at 18, Nate worked in the 1031 industry, focusing on business development through a unique white-labeling model. Following a religious mission in Taiwan, he continued in the industry until the 2008/2009 real estate crash. During the downturn, Nate pursued entrepreneurship and marketing, working with startups and outdoor companies. As the 1031 market recovered, he returned to work with his father, aiming to provide a more personalized experience for clients. Nate is passionate about outdoor activities and spends his free time with his wife and four sons, enjoying fly fishing, skiing, backpacking, rock climbing, and riding dirt bikes.