You can use a 1031 exchange to defer 100% capital gains tax if you reinvest the proceeds from the previous or relinquished property into another like-kind property. Using a 1031 exchange, investors can defer capital gains taxes, which they otherwise would have to pay. ‘Like-kind’ means that both relinquished and replacement properties must be similar. For example, you can exchange a multi-family apartment for a retail shop or vice-versa. To complete a 1031 exchange, an investor must abide by the rules laid down by the IRS.
Important factors when locating a 1031 exchange property:
1)Contacts – If you aren’t an experienced investor, you may have limited contacts. When locating properties, the first thing you need is reliable sources. The contact information of some real estate brokers is important.
2) Market knowledge – The return of an investment depends upon the market. Not every location offers the same return. Inadequate knowledge of the market where you’re investing can surely affect investment.
3) Availability – No matter whether you’ve planned your investment in advance or nor, you can only get hold of a 1031 exchange commercial property if it’s available. As more and more investors have started doing 1031 exchanges these days, it has become difficult to find a property when required.
You can find a 1031 property list on the websites of a few real estate companies that facilitate 1031 exchanges.
Net leased properties are less management-intensive assets.
A triple net (NNN) lease is a single-tenant arrangement that asks tenants to pay all operating expenses associated with the property they’ve rented. This kind of lease agreement removes the burden of property management from an investor’s shoulders by asking the tenant to pay all operating expenses along with the base rent. Operating expenses, the tenant covers under a NNN lease includes insurance fee, property taxes, and maintenance cost. Single-tenant triple net lease properties for sale could be found with the help of a financial advisor or real estate broker.
Real estate investors choose NNN lease mainly to rid of the burden of property management, which sometimes could get extremely painful. Not only because managing a real estate property requires money, but also because it requires a considerable amount of effort and time. Every investor has their reasons. Bob Wilson, a NNN investor in Texas, shares his story of management-free investment.
What made you invest in NNN properties? Was it increasing maintenance expenses?
To some extent, yes, but it wasn’t the only reason behind switching to a NNN lease. In my case, time was the main reason. I had a rental property in Austin. I had leased it to a local tenant under a gross lease around eight years ago. He would pay me a flat rent, a part of which I would spend on operating expenses. Since I was getting a fair rent, spending a part of it on the maintenance wasn’t an issue for me. However, after a couple of years, I realized that I was spending too much time keeping the property intact. My tenant would frequently call me for repairing works. One day it would be pipeline repair, another day something else, and I would have to be there for carrying it out. Plus those midnight reminders on upcoming bills. You can see, it was more of mental stress than financial in my case.
How did you come to know about NNN investment? Did it turn out to be the right decision?
It was the best decision I would have taken in my long investment career of 18 years. However, the credit goes to Timothy, my financial advisor. One day I told him that I want to sell that rental property irrespective of what I get in return. I was pissed off, and it was visible on my face. Timothy then suggested me to invest in NNN properties. He came up with a list of single tenant triple net lease properties for sale that were available in Texas. Almost every property was of institutional grade, and so the prices were on the higher side, costlier than my property. However, I didn’t take long to decide. I had to relinquish my old property. I wanted a management-free investment structure, and a triple net lease provided me that.
So you sold your old investment property and bought a NNN property. Weren’t you worried that you would have to pay taxes on your capital gains?
I did sell it and invested the proceeds in the NNN property that I still have. However, I used a 1031 exchange for it. Timothy had already warned me of tax consequences that would come into play if I sold my old investment property. Therefore, he asked me to do a 1031 exchange instead of a direct investment. So, I went through several 1031 NNN properties for sale on hundreds of websites and chose the one that was ideal for me. As a result, I didn’t only get rid of the burden of property management but was also able to defer capital gains tax. I would suggest a NNN lease investment for any investor who wants a steady flow of income without any liabilities.