Senior housing is a critical part of our society, however, that does not mean that everyone is capable of running one. Despite its crucial role in the life cycle of humanity, senior housing is rarely a profitable business due to its ongoing expensive upkeep.
If you are the building or business owner of senior housing, selling may become a more attractive option in each year of operation. Today, there are more resources than ever available for senior homeowners to find a buyer and sell their property for a large sum of money. Of course, that sale is going to be taxed, so don’t start celebrating too early.
In this quick guide, we will show you how to 1031 exchange senior housing in order to maximize the sale. Whether you are an individual taxpayer or an operating business entity, a 1031 exchange can be used to minimize capital gains taxes paid on the sale of senior housing.
How to Sell A Senior Housing
Before you can 1031 exchange senior housing, you will first need to sell it. Selling your nursing home is likely going to be the most difficult part of the 1031 exchange process. While some businesses don’t go a day without someone asking to buy them out, it is very rare that individual investors will approach a senior homeowner in order to acquire the property and business. Instead, senior housings are sold through outbound marketing techniques, which usually includes the help of an intermediary or private equity firm.
Selling senior housing is typically not a quick process. Most senior housings remain on the market for months and sometimes years, depending on the location. While some property developers may be able to convert senior housing into a profitable entity, there are also many local restrictions that prevent senior housings from changing forms so as to ensure the health of seniors in the area.
Determining the Value of Senior Housings
Although the initial selling price is likely to be determined by a third-party intermediary, there are a few things to consider when trying to find the approximate value of a senior housing. In most cases, senior housing change hands while continuing to operate as a business and residence for those living onsite. While you can’t put a price on human life, the following should be considered when determining the initial value of senior housing:
- Building size and condition
- Property size, condition, and zoning laws
- Number of current tenants, and/or waiting list
- Pay, ownership, or leasing structure
- Asset quantity and condition (furniture, appliances, etc.)
- Strategic vendor partnerships
- And more
In many ways, selling a nursing home is like selling an apartment building, community center, and hospital all at the same time. With this in mind, senior housings are typically sold for over a million dollars in most major cities. Today, senior housings are much more likely to be sold B2B rather than to an individual taxpayer.
Taxes Paid on Selling Senior Housings
Upon selling senior housing for a considerable amount of money, large taxes are applied to both individual sellers and businesses liquidizing such a large asset. In fact, total taxation is likely to reach up to 40% of the initial selling price in some parts of the country. Once sold, the following are typically applied to senior housing transactions:
- Federal Income Taxes
- Capital Gains Taxes
- Sales Taxes
- Local Taxes
- And More
Of course, smart investors know a few ways to minimize taxation with completely legal methods offered by the IRS. For instance, the 1031 exchange can be utilized to completely defer capital gains taxes that would otherwise be applied to the sale of senior housing.
How to 1031 Exchange Senior Housing
A 1031 senior housing exchange makes it possible to lower taxes on the sale with the acquisition of a new like-kind property. If the new property is of equal or greater value than the senior housing, all capital gains taxes will be deducted with the 1031 exchange. In the same vein, lower-valued assets make it possible to mitigate a portion of the capital gains taxes otherwise paid.
Senior Housings Like-Kind Properties
When it comes time to explore new properties, taxpayers and businesses have a lot of freedom to choose many different types of assets to purchase in the 1031 senior housing exchange. The IRS has designated in the 1031 exchange code that new properties must be of “like-kind,” however arguments can be made for most personal property types. Both physical and intangible assets like the following can be purchased after the sale of senior housing in a 1031 exchange:
- Mineral rights and royalties
- Water and ditch rights
- Apartment buildings and condos
- Hospital equipment
- Office furniture
- Farmland, livestock, etc.
- Wetland mitigations credits
- And much more
Of course, highly-valued assets like senior housings have an enormous amount of potential when considering the tax-free acquisition of a new large asset.
Timeline For a 1031 Senior Housing Exchange
Like we said earlier, senior housings can take a considerable amount of time to sell. Once the deed of sale has been signed, however, the clock begins ticking on a person or entity’s eligibility for the 1031 exchange of senior housing. In order for the new acquisition to be valid in a 1031 exchange, a new asset must be purchased within 180 days (approximately 6 months) of the sale.
For additional requirements, please see our 1031 Exchange Rules and Requirements Page.
Using an Intermediary to 1031 Senior Housing
With pressing deadlines and endless paperwork (most of which we are afraid to mention), most senior housing sellers use a specialty 1031 exchange intermediary to facilitate the sale and tax process. In doing so, investors can spend more time and less money on their senior housing transition.
What’s the Best 1031 Exchange For a Senior Housing?
Despite only being available in a handful of countries, many American investors are unaware of the unique opportunity they have in owning mineral rights. By purchasing mineral rights in a 1031 exchange of senior housing, former senior homeowners can develop a steady stream of passive royalty payments in exchange for leasing their rights to an oil and gas company. As a drastically different business model than senior housing, mineral rights are a great way to retain the most from a 1031 exchange while paving a path for ongoing financial freedom.