When buying and selling triple net lease (NNN) properties, there are certain rules and regulations that you can take advantage of to make the most out of your investments. And, one of these rules is the 1031 Exchange.
In this article, we will discuss what this Internal Revenue Service (IRS) tax code is and how 1031 Exchange NNN properties can benefit from it.
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What Is the 1031 Exchange?
The 1031 Exchange is an IRS code that allows investors to defer their capital gains taxes when they sell their investment properties.
This means that, as an investor, you can sell your property and reinvest the proceeds into another “like-kind” property and defer paying any capital gains taxes on the sale.
However, in order for the 1031 Exchange to be valid, there are a few key requirements that you must meet.
It’s also important to note that 1031 Exchanges are not just limited to net leased investment properties.
In fact, they can be used for any type of investment property, including residential and commercial properties.
Regardless, these exchanges can be a bit complex, and there are some strict rules that must be followed in order for the exchange to be valid.
That’s why it’s important to consult with a qualified 1031 Exchange intermediary before beginning the process.
1031 Exchange Rules That You Should Know
As mentioned above, this IRS rule can be a bit complex and there are some strict rules that must be followed.
Below, we will outline some of the key rules that you should be aware of when it comes to 1031 Exchange NNN properties.
- The replacement property must be “like-kind”, which means that it must be of the same type as the original property. For example, if you’re selling a gas station, you can only purchase another gas station as your replacement property.
- The investment properties must be used for business or investment purposes. 1031 Exchanges cannot be used for personal use properties.
- You must work with a qualified 1031 Exchange intermediary, who can be an individual or a company that facilitates the exchange process.
- You must reinvest all of the proceeds from the sale of the original property into the replacement property. If you take any cash out of the exchange, it will invalidate the exchange, and you will be liable for paying capital gains taxes on the entire amount.
- The replacement property must be equal to or greater in value than the original property.
- The replacement property must be purchased within 180 days of selling the original property.
- The replacement property must be identified within 45 days of the sale of the original property.
By complying with these rules for your triple net lease investments, you can defer your capital gains taxes and use that money to reinvest in another property.
How a 1031 Exchange Intermediary Helps
A 1031 Exchange intermediary is a neutral third party who will hold the proceeds from the sale of your property until you identify a suitable replacement property.
They will ensure that all of the necessary paperwork is completed correctly and in a timely manner.
One of the key benefits of working with these professionals is that they can help to make sure that your 1031 Exchange is processed the right way.
This is important because, if there are any mistakes made when selling and buying NNN property, you could forfeit all benefits that you can enjoy from the exchange.
Another benefit of working with a 1031 Exchange intermediary is that they can act as a buffer between you and the other party involved in the exchange. This can help to prevent any potential conflicts or problems from arising.
Benefits of 1031 Exchange Compliance for Investors
Aside from being able to defer capital gains taxes on the sale of an investment property and reinvest your proceeds in another one, 1031 Exchange compliance provides more benefits for investors.
Ability to Purchase a More Expensive Property
Under the exchange, you will be able to buy a property at a higher price than what was originally sold.
For example, if you sold a $500,000 property, you can use the proceeds to buy a more expensive $600,000 property.
This is because 1031 Exchanges allow you to “trade up” in terms of the price of the property.
Increased Borrowing Power
1031 Exchange compliance can increase your borrowing power because banks and other lenders will often view your properties as being more stable and less risky than other types of investment properties. As a result, they may be more willing to lend you money.
This can be a valuable benefit if you’re looking to purchase a more expensive property or if you’re looking to borrow money for other investment purposes.
Improved Cash Flow
The proceeds from the sale of your property can be used to buy a replacement property that generates more income.
For example, you could sell a gas station and use the proceeds to buy another property that is currently leased by a more reputable tenant.
This can help to provide you with a steadier stream of income and can make it easier to meet your financial obligations.
Ability to Exchange Multiple Properties at the Same Time
This can be a valuable benefit for triple net lease companies looking to sell a portfolio of properties or for individuals looking to trade up to a more-expensive property.
For example, let’s say that you own three NNN properties that are each worth $500,000.
You could sell all three of them and use the proceeds to buy a single $900,000 NNN property.
This would allow you to defer your capital gains taxes on the sale of the three properties and would provide you with a larger investment property.
As you can see, there are many benefits that come from 1031 Exchange compliance. These can help you to grow your portfolio and increase your overall returns.
Getting Started with 1031 Exchange Compliance
The first thing that you need to do is identify the property that you want to sell. Once you’ve done it, you need to find a buyer for the property.
Once you’ve found a buyer and the sale is complete, you’ll need to find a replacement property that meets the requirements of 1031 Exchange compliance.
Next, you’ll need to complete the exchange within the specified time frame.
This includes completing all of the necessary paperwork and making sure that all of the requirements are met.
For more information on 1031 Exchange, you can check out this page buynnnproperties.
Conclusion
If you’re looking to sell an NNN property, 1031 Exchange compliance is something that you should consider.
Not only that it can help you to defer your capital gains taxes, but it can also provide you with a number of other benefits.
But to ensure compliance, you should seek the help of professionals who are experienced with 1031 Exchange NNN properties.
This will help to ensure that the process goes smoothly and that you’re able to take advantage of all of the benefits that this privilege has to offer.
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