You may have heard or read about Section 1031 of IRC that lets investors defer capital gains tax on exchanging two investment properties. However, it isn’t as easy as it may appear. To successfully complete a 1031 exchange, an investor must abide by the following guidelines set up by the IRS.
- A 1031 exchange investor must involve a Qualified Intermediary in their exchange. A 1031 exchange isn’t possible without the participation of a Qualified Intermediary.
- Once you sell your old property, you need to identify one or more potential replacement properties within 45 days. It is known as the Identification Period, and you must send details of the potential replacement property to the IRS before the 45th day.
- Every 1031 exchange investor must complete their exchange within 180 days, including the 45 days for property identification.
- The new property must also be used for business purposes. However, they needn’t serve the same purpose or used in the same way.
- Properties involved in 1031 exchanges need to be investment properties. Personal properties or private lands don’t qualify for a 1031 exchange.
- The market value of the new property needs to be equal to or greater than that of the old property. The replacement property must also have equal or greater debt than the relinquished property.
- 1031 exchange investors can’t hold the proceeds from their relinquished property, and it must be transferred to an escrow or third-party account.
Acquire institutional-grade 1031 exchange commercial properties in six steps –
Yes, that’s true. You can easily get hold of large institutional-grade 1031 exchange commercial properties in six simple steps if you manage your exchange properly. Follow these steps –
- Choose the investment property you want to trade and list it for sale.
- Sign a 1031 exchange agreement along with a Qualified Intermediary (QI). Make sure you meet requirements of the Federal Tax Law, especially those pertaining to the proceeds.
- Sell your old property and transfer the proceeds to the QI.
- Identify different 1031 exchange commercial properties in 45 days.
- Buy the identified property on the closing day, i.e., on or before the 180 days, which starts the day your old property is sold.
- Submit Form 8824 to the IRS at the time of filing taxes along with other required documents.
What bothers most investors, is the midnight calls reminding them of dues on their properties. Generally, an investor or property owner is responsible for paying all expenses associated with their property. Expenses like maintenance cost, property taxes, insurance fees, etc., are an investor’s responsibility. Undoubtedly, if anyone owns a rental property, a part of their income goes into paying off property bills. However, switching to NNN investment can provide relief from property management and save those extra dollars, which you would be otherwise spending on property bills.
Triple-net or NNN lease is a single-tenant net lease agreement that requires the tenant to pay all operating expenses instead of the landlord or property owner. Different from a standard or gross lease where the tenant is only responsible for paying property rent, a NNN lease requires them to pay additional property expenses along with the base rent. NNN investment is best suited for investors who want to get rid of the burden of property management. The rent of property leased under a NNN lease is slightly less than that of the property leased under a standard lease as the tenant is also responsible for paying the property expenses.
How can you get hold of a NNN property using a 1031 exchange?
Before we delve into this, it’s important that you know which property expenses the tenant is liable to cover in a NNN lease. This entirely depends upon the type of lease you’re part of. For example, an absolute NNN lease requires the tenant to pay three property expenses – insurance fee, property taxes, and maintenance cost (together known as the three-nets).
On the other hand, a double-net or NN lease requires the tenant to pay two property expenses along with the base rent. Though these two property expenses could be any, it mostly includes property taxes and insurance. Whereas, the landlord is still required to pay the maintenance cost of the property. Similarly, a single-net lease just adds one property expense along with the base rent, which could either be insurance fees or property taxes. Whereas, the investor is liable to pay the remaining expense on the property.
As you can see, different leases cover a different number of expenses. Therefore it’s important that you choose your lease wisely, as an absolute NNN lease can take-away all your burden, whereas a double or single-net lease will do it in bits and pieces.
Now, this brings us to our main concern. How can you complete your 1031 exchange using NNN investment? The answer to this depends upon your current position. If you’ve already closed on the sale of your relinquished property, all you need to do is identify different NNN 1031 exchange properties options and buy the same within 180 days. Not to mention, your exchange period of 180 days starts the day your relinquished property is sold. So, if you’ve already in the middle of your identification period, you should act quickly.
Still worried about your exchange? Talk to an advisor.
No amount of planning is enough if not implemented properly. Therefore, no matter how much you plan your 1031 exchange in advance, you must execute it properly. You may require the assistance of an experienced 1031 exchange advisor for this. A 1031 exchange advisor can help you identify the challenges that you may face while executing your 1031 exchange. In addition, they can help you in exploring different sectors where you can invest. Therefore, if you’ve any queries or if you’re worried about your 1031 exchange, you can speak to one of our impaneled 1031 exchange advisors.