From a business standpoint, owning a hotel or a motel is one of the most interesting property types in a portfolio. While a highly profitable daily rate can lead to enormous cash flow, uncontrollable influences may lead to a hotel’s or motel’s ultimate demise.
So when you’ve decided that your hotel has had its last facelift, you may be interested in selling your property to invest our money elsewhere. In both hotel and motel sales, a 1031 exchange can be utilized to eliminate capital gains tax when reinvesting in a new property.
Unlike hotels and motels, mineral rights and royalties rarely have as much upkeep or attention required to benefit from the investment. In this article, we will outline the steps necessary to 1031 exchange hotels and motels into mineral rights and royalties.
How to Sell a Hotel or Motel
Of course, in order to 1031 exchange hotels and motels, you must first obviously sell it. Selling a hotel or motel may actually be considerably harder to sell than you may have anticipated. In communities with dwindling populations or tourism, hotels and motels commonly sit on the open market for months and even years on end.
Today, most hotels and motels are sold with the help of a commercial real estate agent. In some cases, the hotel’s property may only be sought out for the desirable land it occupies, whereas the majority of new owners will likely try to operate the businesses or repurpose the structure.
Determining the Value of Your Hotels and Motels
Whether you are using the help of a professional third party or not, it’s always a good idea to know the approximate value of your hotel when trying to sell it in the open market. As most hotels are sold as operational entities, there are a considerable amount of factors that go into determining the value of a hotel or motel.
Some of these include:
- Property Size
- Building Size and Condition
- Current Assets (i.e. beds, dressers, TVs, etc.)
- Staff and Business Conditions
- Branded chains vs. non-branded
- Hotel vs. motel
- Amount of Parking
- And more
While it may be challenging to tally all of your assets into one magic number, hotels and motels are being sold all around the country. With this in mind, it is not difficult to check online marketplaces to see the average hotel and motel prices in current market conditions.
Taxes Paid on the Selling Hotels and Motels
When piecing it all together, both hotels and motels can be sold for enormous amounts of capital. Since the dawn of time civilization, however, taxes have been taken out of large property sales, and hotels and motels are no exception.
In the United States, the following are paid on the sale of a hotel or motel:
- Federal Income Taxes
- Capital Gains Taxes
- Depreciation Recapture
- Sales Taxes
- Local Taxes
- And More
So clearly, taxes will add up when selling a motel. Of course, as we mentioned before, capital gains taxes can be deferred if trading a hotel or motel with a 1031 exchange.
1031 Exchange Hotels and Motels
With a 1031 exchange, hotels and motels can be traded for properties of equal or greater value in order to fully avoid any capital gains tax imposed. Properties must be bought and sold by the same taxpayer and deadlines must be met as per IRS regulations.
With this in mind (and the idea of filling out detailed government paperwork), we highly recommend using a 1031 exchange intermediary to handle the tax process and/or assist with the property identification.
Hotels and Motels Like-Kind Properties
According to the IRS tax code, 1031 exchanges are only valid if the properties bought and sold are of “like-kind.” Essentially, what this means is that the assets in question must bear at least some kind of similarities. Thankfully, hotels and motels are considered as both property and business entities, allowing them to be exchanged for a large number of like-kind properties.
- Apartments and apartment buildings
- Single-family homes and condos
- Trailer Parks
- Water and Ditch Rights
- Mineral Rights and Royalties
- And much more
Hotels and Motels 1031 Exchange Timeline
Once a hotel or motel is sold, taxpayers have 45 days to identify at least one property that can be considered for the 1031 exchange. This property does not necessarily need to be the one purchased, but an asset must be acquired within 180 days of the sale for a valid 1031 exchange. Up to 3 properties can be identified, regardless of their value.
For additional requirements, please see our 1031 Exchange Rules and Requirements Page.
What to 1031 Exchange Hotels and Motels For?
Of all of the property assets that can be bought and sold in the world, mineral rights and royalties are one of the only ones that are unique to a few countries. Here in the United States, the acquisition of mineral rights can lead to extensive mineral royalty payments under the right oil and gas lease.
While a hotel or motel requires frequent decision making for the continuous operation of the property, active mineral rights are a rarely-seen, yet a highly-desirable piece of many great investment portfolios.
Hotels and motels have been around forever and will likely continue to function as a large chunk of commercial real estate property throughout the world. With this in mind, hotels and motels are bought and sold constantly, sometimes out of desperation and other times out of pure profit.
Either way, when selling a motel or hotel, a 1031 exchange is great for quickly reinvesting your money with the least amount of capital losses in the process. In the United States, mineral rights and royalties should always be considered as a great opportunity for return on investment.