1031 options for retirement

[Gretchen P.]

My husband and I own 3 properties and are nearing retirement. We'd like to be done landlording, and don't want to have loans. Each property has a loan currently. 

1. Can we sell one property (and not 1031 it) to pay off the loans on the other 2, then sell the paid off properties as 1031?

2. What options do we have that require less involvement than conventional rentals? 

Thanks!

[Ryan Coon]

Gretchen, you’re in a great spot to transition to passive income. To your first point: Yes, you can sell one property to pay off the debt on the others. This actually simplifies your future 1031s because you won't need to meet "debt replacement" requirements on the remaining properties.

Beyond the DST mentioned earlier, you should also consider an UPREIT (Section 721 Exchange). Both are solid passive options, but they function differently:

• UPREITs: These involve trading your property for shares in a large, institutional fund. They offer massive diversification and can be more reliable due to their scale. However, this is the "end of the line" for tax deferral. Once you move into an UPREIT, you cannot 1031 exchange out of it later; your eventual exit will be a taxable event unless you own the asset when you die in which case the step-up in basis would wipe out the deferred taxes.
• Delaware Statutory Trusts (DSTs): These are fractional interests in smaller, specific projects. Because these are often more temporary investments, it is critical to vet the specific deal. The major advantage is that a DST is not the end of the line—you can 1031 exchange out of a DST into another property or another DST in the future.

Regardless of which path you choose, due diligence is everything. Since you are trading management control for passivity, you must thoroughly vet the sponsor's track record and the specifics of the deal before committing your equity.