Why you should consider a 1031 Exchange into senior housing

The current wave of aging Baby Boomers and the coming wave of aging Gen-Xers will provide a large customer base. Thus, creating a considerable option for a 1031 senior housing investment opportunity.  

Like all real estate, location is critical! Some housing markets recently posted record valuations (California, Nevada, and Idaho among them).  Real estate investors in high-appreciation regions have a lot of incentive to sell — cap rates tend to drop and there are larger gains to realize. Unfortunately, liquidating real estate could mean (a) parting with a steady income source, and (b) facing a large tax liability.  

This leaves two unattractive options: investors might miss out on a chance to sell high during the upswing, or they could pay up to 40% of their proceeds to federal and state tax authorities.

So what should you do if you think it is a good time to sell?

Consider selling and reinvesting into a different kind of real estate: senior housing.

It’s in annual Emerging Trends in Real Estate report, PwC named senior housing as one of the best investment sub-sectors. Outlining that “equity returns for senior housing properties have outpaced those of other commercial real estate for the last ten years,” and that “senior housing is increasingly recognized as a critical part of the solution for population health efficiencies and health care cost containment.”

1031 Senior Housing Investment Opportunities 

According to the American Association of Retired Persons (AARP), an average of 7,000 Baby Boomers are turning 65 every day.

The old conception of senior housing was as the “last stop” in the train of life. However, Baby Boomers – being the protest generation – disrupted the old thinking and, in the process, improved the quality of and demand for housing options. Today’s retirees want to live in communities that offer much more than boring games and cafeteria-style food.

This, therefore, is a large, captive, under-served market for investors to tap into. Ultimately, Baby Boomers have created new 1031 investment opportunities.

Not only is it a demographic that isn’t going away anytime soon, but also Boomers live longer (four years longer, on average, than the generations before them) and many are still pretty healthy.  The next wave, Generation X (born between 1965 and 1980), will start turning 65 in 2030.

Baby Boomers’ children will also outnumber their parents by 2028. Thus leading to another wave of seniors on the horizon – albeit less wealthy than their parents. (Attributed in part to higher debt.)

Various types of Housing

There are several categories of senior housing. Within each category, there are subtypes based on target market and size. Assisted living facilities can be as small as a few rooms in someone’s home; others contain several hundred units. Some cater to the rich; others to low-income residents.

Senior housing types are generally based on the level of care required by the residents. They can be communities of condos, single-family homes available to seniors to purchase, or apartments that they rent. There are affordable options for low-income seniors and homes in exclusive neighborhoods near golf courses and other high-end amenities for the affluent set.

Independent Living 

This is an age-restricted community (typically 55+) for seniors who are mobile and need little or no outside care. They just want to be active and develop relationships with people their own age. These can be condos or single-family homes. Needed services are often available to residents on an as-needed basis. These services are usually contracted out to a private-duty company. Activities geared toward seniors are provided.

Assisted Living

These are usually apartment-style communities. Residents can opt for a shared apartment for a lower cost. The average monthly cost for a private, one-bedroom unit in an assisted living facility is about $3,700 (2018 data). This can vary widely from state to state. You’ll pay a bit less in Texas (about $3,600), a bit more in California ($4,000) and a lot more in Massachusetts (about $5,500).

Assisted living, in terms of the level of care, is between Independent Living and Skilled Nursing. It is for seniors who need help with everyday tasks like getting dressed, managing their medications, bathing, and preparing meals. Social activities are provided. Sometimes a salon is onsite. These services are typically contracted out to a private-duty company who may or may not have an office inside the facility.

These type of communities are not typically covered by Medicare or Medicaid. However, the cost can still be less than a senior remaining in their home and paying for home healthcare workers to assist them. In an assisted living facility, most of the utilities, meals, and care are included.

Skilled Nursing

When you hear the term “senior housing,” you may think of skilled nursing facilities. Commonly known as a nursing home, this is for seniors who need a higher level of care.

This type of facility must be accredited in order to receive reimbursement from Medicare and Medicaid. They are required to meet criteria as defined in the Social Security Act. This can limit the profitability of a facility. There are state-run facilities available for low-income seniors. However, they do not have the best reputation. The author’s grandmother, who could no longer care for her husband because he had Alzheimer’s, had to place him in a state-run facility that accepted Medicaid. She would pay the orderlies extra money in the hopes that they would provide her husband with good care.

Memory Care

Memory care is for those seniors suffering from dementia and Alzheimer’s. Their disease has reached the point where staying at home is unsafe. Memory care is often part of assisted living or skilled nursing facilities. However, Baby Boomers are insisting on the type of care that specializes in memory care. Continuous Care Retirement Communities (CCRCs) These communities offer all levels of care described above. The focus is typically on skilled nursing, including memory care. Assistance for other seniors will often be contracted out to other companies. They are likely larger properties since they serve a broader base of seniors.

Seek out competent property management

As an investor in senior housing, quality of care is ultimately more important than aesthetics and amenities. Competent management for your facility is critical. You should truly care about the level of care the seniors in your facility receive. Seniors will have some of the same issues as regular residential tenants (like needing their kitchen sink repaired). However, they have daily needs to which those owners must attend. Depending on your share of equity ownership, you should expect much more interaction with a senior or with those overseeing their care.

Top 5 markets for 1031 senior housing investment opportunities 

According to National Real Estate Investor, the top five markets for senior housing are

  1. California
  2. Arizona
  3. Florida
  4. New England
  5. Washington state

That doesn’t mean you can’t make money in other markets. Like any other rental market, research is key. It is critical to work with a local commercial real estate agent with knowledge of senior housing to understand your target market. What are the demographics? What are other senior housing facilities charging? What are the average vacancy rates?

Possible Concerns

Watch out for high-vacancy markets

Some senior housing markets are overbuilt –, particularly in the “memory care” segment. Areas with more land and fewer restrictions made it easier to build facilities.

Dallas, Houston, Atlanta, San Antonio and Denver fall in this category. National Investment Center for Seniors Housing & Care (NIC) advised that the national vacancy rate as of the fourth quarter in 2017 averaged just under 90%. This was down slightly from the previous year.

What about healthcare labor shortages?

A combination of low pay, terrible hours, and lack of career opportunities have resulted in fewer workers choosing this field. The tightening of immigration hits healthcare particularly hard since one in four workers are immigrants.

This should not steer you away from investing in senior housing, but it’s an important issue to be aware of. If you anticipate dealing with a labor shortage, you can implement a risk mitigation plan. Considering in advance how you can attract and retain healthcare workers should be part of your business plan.

How to boost your tax efficiency

If you sell your current investment for a profit, federal and state governments are going to take away a large slice of your gains. Fortunately, real estate investors have the option to defer their taxes with a 1031 exchange and put their entire gain to productive use.

Here’s a very quick overview of the rules:

  • You sell your property and buy a “like” property.
  • As long as you spend as much or more on the new property, you will not pay taxes on the net gain from the sale. 
  • You have 6 months to complete an exchange.

1031 rules can be opaque and difficult to navigate. However, working with an experienced and reputable “intermediary” will make the process far less confusing. Truth be told, you must use an intermediary because you’re not allowed to complete a tax-deferred exchange on your own. 

Any investment property can exchange into senior housing

A “like” property does not mean that if you sell a single-family residential income property that you must buy another single-family property. Selling pretty much any kind of real estate allows you to buy any kind of real property. For example, you could sell your 8-unit apartment building and buy an assisted living facility.


Investing in senior housing can be a good 1031 investment option. The wave of aging Baby Boomers and the coming aging of Gen-Xers will provide a large customer base and various opportunities. A key component to success in the senior housing space is to know that catering to and caring for a senior is different from serving a typical tenant. Do your research to make sure that the senior housing you choose to invest in is right for you. Work with realtors and other professionals who are highly experienced in senior housing.

If you decide to do a 1031 exchange, be sure to use a reputable intermediary. Investing in senior housing can be profitable and rewarding. After all, you are helping someone’s grandma enjoy her twilight years.

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