Best 1031 Exchange Net Lease Properties for First Time Investors
Looking to sell a house or a commercial building? Why not make that money work? We have a way for you that can turn your office building into a steady monthly income from a reliable lessee.
And we’re not talking about renting the offices.
There’s a thing called a 1031 exchange. It can help you not only make money but avoid paying the capital gains tax. All that in a legal way, according to Section 1031 (hence the name) of the US Internal Revenue Code.
According to the contents of the Section, anyone using this exchange method doesn’t have to pay the said taxes. This saves a lot of money and can turn the money your work for into the money that works for you.
Here, we’ll talk about the steps you have to take to achieve results in this exchange, its benefits, and what kind of properties it’s best to invest in.
More on 1031 Exchange
We’ve established what this process is. You sell property and don’t have to pay capital gain taxes because they are transferred to the new asset you purchase instead. So, basically, the tax is there, but you’ll only have to pay it if you decide to exit the business and sell all the property without getting anything else.
But there are lots of intricacies you need to know about, such as:
- The final date of the substitute asset deal closing;
- The cost of that asset;
- Its type, etc.
No matter the difficulties, thousands of people perform the exchange with the help of qualified professionals. Some never cash out, which leaves them not having to pay the tax at all.
And if you can make money from that property, why sell it?
The Benefits
Here are the major benefits of the 1031 exchange:
- You don’t have to pay capital gains taxes.
That being said, you will have to pay them upon the selling of the final exchange property. But who said you need to sell it? It’s possible to use the exchange method over and over again. - You can automate income.
By purchasing commercial space, you can lease it using a triple net lease to a business chain, for example. This will result in a stable monthly income with no additional expenses. - It’s legal.
Unfortunately, many people are trying to avoid paying taxes at all. This type of exchange, on the other hand, is completely legal. Make sure you contact professionals to consult you on the proceedings.
There are more benefits for each particular case. You’ll discover them after working with a professional.
1031 Exchange Net Lease Properties: Best Choices
In this section, we’ll talk about types of property to invest in and ways to find it. The safest deals are usually made when you have a professional by your side; so, consider that.
Now, to the options!
Turnkey Real Estate
Turnkey properties are suitable because they are ready-to-close deals. You can purchase it right after selling the former asset, fitting into the 1031 exchange window. Oftentimes, such real estate comes with tenants and management teams at your service!
If the asset you want to exchange to doesn’t have a lessee yet, here’s a tenant profile list for you to choose some of the most reliable tenants. Achieving such a passive income with a trustworthy lessee is an amazing option for retirement or if you just want to automate a part of your income.
Qualified Specialist
An intermediary, a consultant, a real estate agent…it can be any specialist qualified to facilitate the exchange. Such a specialist will help you close the safest deal, choose a like-kind property, and complete the process in time.
Find experts in your area or close to it to be able to get a narrow-field insight. Some professionals can even complete the whole operation themselves, on your behalf.
Investor Platforms
There are lots of investor platforms where you can find information on the latest best deals in your area, insights from other investors, and a piece of advice on your case.
You can network there and find leads.
FAQ on 1031 Exchange
For future reference, we’ve compiled a brief FAQ on the topic, so that you know where to look for essential information before proceeding.
When should I complete the exchange?
This is the part many people initially miss. The exchange has to be completed in 180 days after you’ve sold the former asset.
How much should the new property cost?
The key is that the replacement asset needs to be equal to or more expensive than the former one. We mean the selling price of the former asset. So, if you sell real estate for $500,000, expect to spend at least that much on the new one.
Thus, you’re gaining no capital gain, so you don’t have to pay the tax.
What exactly is like-kind property?
The assets you sell and purchase within the exchange have to be similar. It’s always better to work with a professional to make sure you choose proper real estate as a substitute. The IRS describes the qualities in broad strokes.
Basically, if you sell an apartment building, you can buy an office building instead. An area where you can build something will qualify as well.
There’s one more rule: no personal property as a replacement.
So, 1031: Yes or No?
We say yes if you have an idea to buy a similar asset for an equal or larger sum of money. You need to remember that if you sell the property, you will still have to pay the tax. But you can do the exchange many times, thus avoiding the extra tax payment.
Triple net leasing is a good idea if you’re buying a commercial space. Look for trustworthy tenants for the safest deals. They will cover all the additional costs and will take responsibility for the real estate in exchange for a lower basic rent.
This is very convenient for people looking to automate their investments.