1033 Exchanges: From Hurricane Losses to Tax-Advantaged Real Estate Exits

Creative, Passive Options May Turn Misfortune into a Hands-Off Retirement

Johannes Ernharth AIFA®

Transitional Real Estate Wealth Strategist

The devastating 2024 hurricanes that struck Florida left widespread destruction in and caused relentless flooding across parts of North Carolina. For business and investment real estate owners, the storms not only destroyed property but also disrupted carefully laid plans—particularly for those nearing retirement or considering lifestyle-driven exits.

Many affected owners are now left grappling with the uncertainty of what lies ahead. Insurance and other compensation for damaged or condemned property often bring an unexpected dilemma: Should the proceeds be used to rebuild and restart operations? Or is it time to fast-forward retirement plans and move on to the next chapter of life?

However, this decision can lead to significant tax consequences.

Given the vast appreciation in real estate values over the past few decades, such payments often reflect an appraised and insured market value well above the property’s cost-basis. In other words, despite a property’s dispossession being entirely involuntary, if the owner simply takes the proceeds and decides to call it a day, that can trigger a sizeable tax bill.

The related hit to family net worth can be substantial, affecting future income and growth on remaining wealth.  It also sacrifices estate planning tax benefits for heirs.

An Alternative: 1033 Exchanges.

Most owners should consider the potential tax and planning benefits of using 1033 Exchanges to improve outcomes.

1033s were created during the Revenue Act of 1921 to mitigate the tax consequences for those involuntarily dispossessed of a wide variety of personal, business, and investment property.

For investment and business use real estate specifically, owners can avoid unnecessary taxes by reinvesting eligible proceeds into passive, income-producing properties such as Delaware Statutory Trusts (DSTs) or Tenant in Common (TIC) ownership interests.

Compared to the all-consuming requirements of actively sourcing, underwriting, and then retaining operational control of active, fee simple real estate, for many owners a Passive 1033 Exchange is the preferred alternative.

Such real estate can be a far more accommodating to their desired lifestyle changes and planning preferences. More leisure. More family time. More lifestyle that makes the most of one’s health while it’s still vibrant.

In other words, a Passive 1033 is often a welcome silver lining to having been suddenly forced to confront an exit and major life transition earlier than expected.

1033 EXCHANGES FOR ELIGIBLE PASSIVE REAL ESTATE

1033 Exchanges allow for tax deferrals on payments for destroyed and condemned investment and business real estate if reinvested correctly.  Replacement property need only be of equal or greater value than the gross payments received to achieve a full tax deferral -- and for net worth to stay intact for the owner, the family, and their estate plan.

1033 Eligible Passive Investment Property

Business and investment real estate is eligible for 1033 exchanges into real estate of similar use. For such owners, this is more broadly defined as real estate for investment and business purposes, similar to the like-kind property definition in 1031 Exchanges, which includes Delaware Statutory Trust and, for larger dollar amounts, Tenant in Common (TIC) ownership interests.

DSTs

DSTs are pre-structured, professionally underwritten and managed ownership entities for various types of operational investment real estate. When suitable, DSTs can be ideal for those looking to retire from active obligations of investment and business property.  With minimum investment amounts as low as $100,000, DSTs allow for diversification and frequently provide access to institutional grade properties that are ordinarily out of reach of most real estate investors.

DSTs typically hold conservative, core or core-plus properties with established and stabilized cash flow. Moreover, DSTs frequently use leverage that is non-recourse to investors but nonetheless contributes proportionally towards meeting the equal or greater value obligations. This can overcome shortfalls from payments that are reduced by debt that must be paid off on the destroyed property.

Tennant in Common (TIC) Opportunities

For those of higher net worth with larger payments, who are still seeking the hands-off benefits of professional underwriting and management, Tenant in Common (TIC) opportunities can be Suitable. TICs may be scaled among a wider range of investment property types and styles.  This allows for more opportunistic and customized 1033 property acquisitions, such as distressed, lease-up, and value-add opportunities.

In either circumstance, when owners and families decide it’s best to move on from the many obligations of operational real estate control, with Passive 1033s they can do so without triggering unnecessary taxes and keeping net worth intact for the future.

Potential Planning Benefits

Each owners’ situations can vary dramatically in terms of priorities around debt, tax, retirement, succession, estate, and charitable planning. For elderly owners whose families and surrogates are increasingly involved in overseeing active operations, DSTs and TICs can provide much greater transitional flexibility, streamlining oversight while minimizing related obligations.

For example:

• Passive ownership mitigates potential for reflexive or rash problem-solving made by family during crisis, such an owner’s incapacity, and minimizes family conflicts common to shared decision making on future inheritance.

• Heirs can inherit proportional ownership interests directly, avoiding sibling co-ownership entanglements. Upon those investment’s respective liquidity events, heirs and trustees may independently choose what to do with proceeds.

How RCX Supports 1033 Exchanges

At RCX, we specialize in guiding advisors and clients through complex real estate wealth transitions, including 1033 Exchanges.

• Our team brings extensive expertise in evaluating real estate transactions, analyzing property investment strategies, and advising on investment sponsor opportunities among DSTs and TIC properties. We provide comprehensive due diligence and consulting services to ensure every step of the process is seamless and informed.

• For advisors, we offer insights into the mechanics of DSTs and TIC structures and candidate properties. Our tailored solutions align with your client’s unique goals, enabling you to integrate these strategies into both current and long-term plans.

• To streamline the transition to passive real estate ownership, RCX offers pre-vetted DST and TIC opportunities with rigorous due diligence already completed. These options are designed to align with the objectives you’ve established for your clients, making the transition efficient and effective.

For a deeper understanding of 1033 Exchanges, download our comprehensive guide here:

This is not an offer or solicitation to buy or sell any securities. 

Some of the risks related to investing in commercial real estate include, but are not limited to: market risks such as local property supply and demand conditions; tenants’ inability to pay rent; tenant turnover; inflation and other increases in operating costs; adverse changes in laws and regulations; relative illiquidity of real estate investments; changing market demographics; acts of God such as earthquakes, floods or other uninsured losses; interest rate fluctuations; and availability of financing. Investments in real estate or real estate securities are not guaranteed and have the potential to suffer losses.

This site provides brief and general description of certain tax strategies including Sections 1031, 1033, and 721 Exchanges. There are various risks related to purchasing securities as part of any planning strategy, including tax complexity, illiquidity and restrictions on ownership and transfer. RCX Capital Group and its representatives do not provide Tax Advice. Because each prospective investor’s tax implications are different, all prospective investors should consult with their tax advisors.