What is the best 1031 option to a pure passive endeavor

[Brian Capossela]

I own a few buildings in the socialist state of California.  What is the best 1031 options to go purely passive (from self manage --> what?)?  

Best,

Brian Cap

[Dave Foster]

@Brian Capossela, No one understands the pain of taxes more than a resident of CA!!! And since your properties are in California, a move to passive investing will allow you to consider investing out of state, where you wouldn't incur so much tax liability and could access untouched markets. At least partially. You want to remember that even if you move your portfolio outside of CA using 1031 exchanges, they still have a clawback. Any time you sell one of your replacement properties without a 1031 exchange, CA will want tax back from the years the properties were in CA. Of course, the answer to this is to never sell without a 1031 exchange, and you'll never have to pay CA a dime.

Consolidation Exchanges- If you would like to minimize your portfolio and channel your equity into a larger investment like an apartment complex or commercial real estate, you could do what we call a consolidation exchange by selling multiple properties and acquiring a larger property with the proceeds, all while deferring the tax and any depreciation. This would minimize how hands-on you would have to be managing multiple properties, and have greater appreciation and cash flow potential.

NNN Commercial properties are a great example of this. You eliminate the multiple management points of several properties. And exchange those for one larger property where you are now managing one tenant and one longer term lease. The market hasn't been kind to NNNs for a while with interest rates. But that does seem to be easing a bit.

Diversification Exchanges- If you want to be more diverse, you could do what we call a diversification exchange, where you sell a large investment property to purchase multiple smaller single-family investment properties, and again, deferring all of the tax and depreciation. This would allow you to reach growing markets in different areas or even out-of-state. This can be especially attractive if you go into vacation rental properties that can be structured as active endeavors for tax purposes, with the benefits of both technology and local management to lessen your hands-on involvement. But beware, the tax benefits of STRs are alluring. But sometimes you'll trade one headache for another management-wise unless you plan your management carefully.

There are also syndications, such as DSTs (Delaware statutory trust), that meet 1031 exchange treatment and would allow you to defer all of the tax and purchase a passive investment without having to manage property and still have cash flow. These are also often used by the investor who isn't sure of the market direction and wants to park their proceeds while they patiently wait for a more attractive market and interest rates to be more favorable.

True (modern use of the word) syndications that allow 1031 money are rare. But, if you can find them, @Mark Kenney gave you some good things to watch for.