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1031 Exchange Overview for Student Housing

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1031 Exchange for Student Housing

A Student Housing 1031 exchange allows you to defer paying taxes when you sell an investment property, by reinvesting the proceeds in a qualifying replacement student housing investment property under the Internal Revenue Code Section 1031.

 

Learn Eight Great Reasons to Add Student Housing to Your Portfolio.

student housing asset class investment
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“Student housing may be one of real estate's best-kept investment secrets.”

“Student housing offers a degree of stability that isn’t always present in other real estate sectors.”

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Eight Great Benefits of a 1031 Property Exchange!

Learn how investing in a 1031 property exchange can benefit you!

1. DEFER YOUR CAPITAL GAINS TAX

Allows investors to defer capital gains on the sale of their real estate.

2. MONTHLY CASH FLOW

Investors can sell a little/no income producing property (e.g. land) and purchase property(s) with greater cash flow performance (e.g. student housing).

3. LEVERAGE

Funds saved by deferring capital gains and other taxes, investors have increased funds to purchase a larger property.

4. CONSOLIDATION

Investors can sell smaller properties and purchase one larger property to maximize ownership benefits and reduce management responsibilities.

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5. INCREASE DEPRECIATION

Investors can exchange from a non- depreciable property (e.g. land) to a property that can be depreciated (e.g. student housing).

6. PROPERTY MANAGEMENT RELIEF

Investors who no longer want to manage high-maintenance properties can reinvest in properties requiring little or no management.

7. PORTFOLIO DIVERSIFICATION

Investors can expand the number or types of property in their portfolio in addition to investing in various markets and/or states.

8. ESTATE PLANNING

Investors may continue to replace properties through consecutive 1031 exchanges, preserving profits until and estate can be passed down tax free (if under the tax cap).

4,600 College Institutions Service 20 Million Students.*

*National Center Of Educational Statistics 2016

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Top Reasons to Add Student Housing to Your Portfolio

Here are some of the top reasons why adding student housing asset class to your portfolio is a good idea.

1. Recession-Resistant Characteristics

Student housing occupancy rates remain stable during economic booms and may actually rise during downturns because of increased college attendance.

2. Students Are Staying in School Longer

Four years is no longer the standard for degree completion. According to the U.S. Bureau of Labor Statistics, exactly two-thirds of high school grads are taking significantly longer to complete their degrees. Where are they going to live while in school?

3. Increase of Rental Rates

Overall the rental revenue, rental rates, and net operating income in student housing properties across the country have continued to rise year over year due to student demand and limited space.

4. Value-Creation Potential

Increased student housing demand by renovating and creating value-add improvements to the properties, may help realize higher returns at a faster rate as compared to the acquisition of stabilized assets.

5. Optimal Investment Strategy

Student housing provides appreciation potential, an inflation hedge, portfolio diversification, and monthly income with tax efficiency through depreciation anchored by student housing assets.

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Our Student Housing Strategy

Our strategy is simple. We try to understand what investors are looking for and what they value most; then find opportunities that best align with those goals. It was this mindset that pointed us toward student housing.
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Nelson Partners believes that well-positioned housing for students near campus can leverage the economic stability of a major university and cater to a demand with less volatility than the macro-economy. Our strategy is to target the well-located properties within walking distance to growing universities that fit within the company’s proprietary buying model. In particular, the company will emphasize value-added opportunities, targeting well-located properties that can be upgraded from extensive renovations with a more contemporary look and feel. The key will be to make cost-effective improvements that students could potentially be willing to pay a higher premium for; helping to raise rents, grow income and appreciate property value.

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College Enrollment Growth in the United States is projected to go to 24 million by 2022**

https://nces.ed.gov/pubs2014/2014051.pdf

We believe well-positioned student housing has the potential to offer a variety of benefits that matter to investors: monthly cash flow, stable performance, inflation-friendly, appreciation, and tax efficiency through depreciation, all from a brick-and-mortar asset anchored by the historical stability of a university.

Student Housing Investment Strategic Categories

At Nelson Partners, our investments typically divides investment opportunities into four strategic categories, each with their own unique goals and objectives.
NEWER ASSETS

Nelson Partners often acquires newer assets that are believed to be stabilized and well-located in strong markets. For these properties, Nelson Brothers typically employs a more conservative buy and hold strategy – where the property is held for a 5 – 6 year period. These assets are 1031 and IRA eligible.

DIVERSIFIED PORTFOLIO

Nelson Partners seeks to diversify our portfolio of student housing properties.  We invest and manage properties across the country in different states and markets.

Click here, to see our current portfolio

RENOVATION, VALUE-ADD

Often, Nelson Partners will come across older properties believed to have a fantastic location with an excellent track record of high occupancy but may not be in the best or the most competitive condition. Our plan for these assets is to devise a strategy to grow rents and increase property value by enhancing the appeal of the property through strategic upgrades, renovations and amenity improvements. These opportunities are typically 1031 and IRA eligible.

GROUND-UP DEVELOPMENT

Every now and again, Nelson Partners will encounter a dilapidated property or a vacant plot of land with an ideal location near a growing university. For NelsonPartners, this can translate into tremendous upside potential through an all-new, ground-up development. Especially in markets where demand is growing faster than supply and the current competitive set is antiquated or lacks modern appeal to today’s pickier students. In this case, NelsonPartners believes a well-executed strategy can potentially bring high returns. Keeping in mind, construction projects inherently bring on a number of risks and uncertainties. For these opportunities, investors should be sure the risks and benefits of a project are consistent with their goals and objectives.

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Our Student Housing Criteria Selection

At Nelson Partners, our strategy is to be disciplined in assets that fit a carefully crafted set of criteria that can potentially help deliver on these benefits.
Student Housing Apartments Near Western Washington University
Latest Acquisition: University Flats in Greeley, Colorado
MONTHLY CASH FLOW

Properties are acquired based on the net operating income in relation to the sales price. Inherently, most of the properties we buy are already profitable and producing income each month. From there, our goal is to maintain high occupancy to preserve the cash flow and do all we can to potentially increase the income through rental rate growth, efficiency operations, etc.

LESS MARKET CORRELATION

We look for universities that have shown consistently inclining enrollment, even during times of recession or a struggling real estate cycle.

APPRECIATION POTENTIAL

With each property, we see an opportunity to potentially grow income and add value. This may be through steady rental growth in a tight market where demand is growing but supply is limited. Or, it may be a more assertive strategy where we’re initiating substantial renovations to upgrade and modernize a property.

STABLE PERFORMANCE

We like properties that have demonstrated a track record of consistently high occupancy in markets where there nearest competitors have also performed well historically. Further, we try to single out properties that we feel have a sustainable competitive advantage (such as a location within walking distance to campus) that may be difficult to replicate. That way, we think the property can maintain steady performance.

TAX EFFICIENCY THROUGH DEPRECIATION

A dollar saved can be a dollar earned. Real estate is unique in that it may be one of the few assets that tend to appreciate over time but that the IRS will allow depreciation to write off the usage of the property. We tend to favor property with lower land costs, written off at the 27.5 year schedule allotted by the IRS. For most of our current properties, this practice has enabled us to shelter up to 100% of the income on the majority of our assets. It’s a huge benefit. Oft-overlooked.

1031 Property Exchange FAQ's

Learn some of the common questions about a student housing 1031 property exchange.

What is a 1031 Exchange

A 1031 Exchange (a Section 1031 of the IRS Code) allows investment property owners to sell their property through an “exchange” by purchasing a “like- kind” property and defer up to 100% of the capital gains taxes which would otherwise be due upon the sale of their property.

3 Steps to Completing a 1031 Exchange

1. Retain a Qualified Intermediary

to sell your existing property and hold the sale proceeds in escrow.

 

2. Identify a Replacement Property

from Nelson Partners within 45 days after the sale of your property.

 

3. Purchase Your Replacement Property

to complete your exchange within 180 days after the sale of your property.

Aquire
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80% of College Students Live Off-Campus

J Turner Research On Student Housing

1031 Exchange Ownership Options

You can own a 1031 property one of two ways:

Student Housing Apts Near WVU

Full Ownership

Sole Owner

Buy the entire invest property and be the sole owner.

 

-OR-

Fractional Ownership

TIC: Tenant-in-Common

Investors are considered co-owners and hold a direct ownership position in the property.

DST: Delaware Statutory Trust

Investors buy an ownership interest in a trust that holds title to the property.

1031 “Like-Kind Property Types

The term “like-kind” refers to the nature or character of the property, rather than its grade or quality. The relinquished or replacement property cannot be the investors primary residence.

  • Apartment Buildings
  • Condominiums
  • Duplexes & Triplexes
  • Hotels & Motels
  • Industrial Properties
  • Office Buildings
  • Rental Resort
  • Retail Centers
  • Senior Housing
  • Single-Family Rentals
  • Student Housing
  • Vacant Land
  • Warehouses
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1031 Exchange Guidelines

The term “like-kind” refers to the nature or character of the property, rather than its grade or quality. The relinquished or replacement property cannot be the investors primary residence.

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  • Sales proceeds must go directly to accommodator
  • 45 days from close to identify replacements
  • 3 rules for Identification: 3-property, 95%, 200%
  • 180 days from sale to close on replacement(s)
  • Must maintain the same ownership entity
  • “Upleg” must have same sales price or higher

1031 Exchange Property Identification Rules

When you identify potential replacement properties for your 1031 exchange, you must comply with one of  the following three rules or your identification will fail.

3-Property Rule

Most investors use this option. This rule allows you to identify up to three potential replacement properties regardless to their fair market value and acquire any or all of them.

200% Fair Market Value Identification Rule

An investor may identify any number of potential replacement properties as long as their combined value (purchase price) is less than 200% of the sale price of the relinquished property by the end of the identification period.

95% Rule Identification Exception

Similar to the 200% rule, the 95% rule allows your to identify any number of replacement properties without regard to price as long as you actually purchase 95% of the value you identify.

1031 Exchange Terminology

Learn the most utilized 1031 Exchange terms that are used today.

QUALIFIED INTERMEDIARY

The entity that is hired, by the exchanger, to facilitate the exchange. This entity is often times referred to as accommodator, facilitator, or qualified intermediary.

CONSTRUCTIVE RECEIPT

This term refers to the control of proceeds by an exchanger whether the exchanger has physical possession of the funds or not. Any time the IRS can deem that the exchanger has either constructive receipt or actual possession of the funds from the sale of the Relinquished Property, then a capital gain is due to the IRS. 

RELINQUISHED PROPERTY

The property “sold” by the Exchanger. Prior to the 1991 amendment of the Section 1031 code, this was often referred to as the “down-leg” of the exchange.

IDENTIFICATION PERIOD

The period during which the exchanger must identify replacement property in the exchange. The identification period starts on the day the exchanger transfers the first relinquished property and ends at midnight on the 45th day thereafter.

EXCHANGER

The taxpayer/seller of property. This person is the party that desires to defer capital gains taxes through the use of an IRC Section 1031 Exchange. The tax code 1031 refers to this person as the Taxpayer. 

LIKE-KIND PROPERTY

This term refers to the nature or character of the property, not its grade or quality. However, real property is “like-kind” as to all other real property as long as the intent is to hold the properties for investment purposes or for productive use in a trade or business. Personal Property can also be exchanged for other personal property.

REPLACEMENT PROPERTY

The property “acquired” by the Exchanger. Prior to the 1991 amendment to Section 1031 code, this was often referred to as the “up-leg” of the exchange.

EXCHANGE PERIOD

The time period during which the exchanger must acquire replacement property. The exchange period starts on the date the exchanger transfers the first relinquished property and ends on the 180th day or the due date (including extensions). If this date falls on a weekend or a holiday, you will have to fall back to the prior business day, in which case you will have less than 180 days.

PROPER TITLE HOLDING

You must purchase and take title to your new property exactly as your old property title.

DELAYED EXCHANGE

An exchange where the closing of the relinquished property can occur up to 180 days after the closing of the replacement property.

1031 Exchange Potential Risks 

All real estate involves risk. Properties can be subject to market fluctuations, seasonal fluctuations, vacancy, higher-than-expected expenses, and other risks. In some cases this may lead to a reduction in distribution levels or even foreclosure in extreme cases. Please consult the Private Placement Memorandum (PPM) of any 1031 Exchange offering for a more complete list of potential risk factors.

Nelson Partners 1031 Exchange Solutions for Student Housing

NP puts together 1031-eligible investments in real estate.

Enable smaller investors to own institutional-grade properties.

Properties can be turnkey, with loan, price and strategy in place for potentially simpler 1031.

Eliminates the hassles of tenants for landlords.

Over the next 15 years 68% of High School Graduates will attend colleges or universities.*

*Bureau Of Labor Statistics 2016

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