The 1031 Exchange is a facility offered by the IRS to permit a property owner or the exchanger to defer capital gains tax incurred from the sale of property. For a property to qualify for exemption under the 1031 Exchange rules, the owner is required to purchase a like-kind property with equal or higher value than that of the relinquished property.
Here, like-kind property refers to a property of similar class, character or nature. For instance, a vacant property bought for investment purpose qualifies to be a like-kind property to retail property, which is held for doing business.
For a hassle-free 1031 exchange transaction, it is best to engage a Qualified Intermediary (QI) who will help fulfill all the complex minutae of this tax rule. In addition, the QI can also act as an independent escrow agent for funds associated with the property exchange(1031 Exchange rules in nnn). The following properties do not qualify under the 1031 Exchange rules:
- Stock or inventory in trade
- Stocks, bonds, or notes
- Other debts/securities
- Interests of Partnership
- Trust Certificates
NNN property or Triple Net property is the most popular type of property for commercial real estate investors(nnn broker). Here are the most common methods used under the IRS Code 1031 to invest in NNN property:
- The Three Property Rule – the most common method is to identify three properties having unlimited value.
- The 200% of Fair Market Value Rule – this rule identifies unlimited properties whose total fair market value remains less than 200% of the properties to be sold in the exchange.
- The 95% Exception Rule – includes implementing the 200% rule and further the exchanger must acquire a minimum of 95% of the fair market value of all the identified replacement properties(Exception Rule)
Essentially, using a 1031 Exchange, an investor can defer paying tax on realized gains and renew equity by disposing of existing, lesser potential assets, investing in other properties with higher potential returns(1031 Exchange rules in nnn). However, tax laws allow for lower depreciation schedules for replacement properties after an exchange is complete(nnn broker).
Allow your expert advisors at Triple Net Investment Group to assist you in disposing of your 1031 Exchange NNN subject properties and identifying and closing on your replacement properties. Call today.
