- Identify the “team” especially a 1031 Intermediary
Since a Qualified Intermediary (QI) cannot provide tax or legal advice, NNN investors should always obtain advice from their own tax and/or legal experts before the exchange process gets underway. A QI acts as the fiduciary (they should be a bonded and insured agent) and escrow agent who conducts the exchange using appropriate documents and holds segregated 1031 funds.
- Modify contracts: Assignment and Exchange Cooperation Clauses
In order to have a valid exchange the QI must modify an investor’s sale (and purchase) agreements by including language that makes the agreement “assignable”. These documents must be modified and readied prior to the fact of sale of relinquished NNN property. Another important amendment to the sale (and any purchase contract) includes the “exchange cooperation” clause, so that all 1031 exchange-related transactions have consent of the “other” party in each transaction. If the sale and purchase transactions are not “1031-ready” thus, any gains that arise become taxable.
- Develop list of potential Replacement Property
One timeline to be cognizant of is the 45 days to begin and conclude the formal identification of a replacement triple net lease property for tax purposes. This 45 day period begins on the day at least one property involved in the exchange is actually relinquished by closing out the sale. It is always a good idea to scout out (or even have them under contract!) a list of “potentials” much before the fact of formal identification of a replacement net lease property.
- Structure sale of (relinquish) property to minimize gains
It is critical to follow the rules of section 1031, as violations will create taxable gains. Since the objective is defer, or at least minimize, all gains arising from the 1031 exchange in 2023, the following basic rules must be adhered to:
- the replacement triple net lease NNN property must be “like” kind;
- the amount of debt used for the relinquished property must mimic debt used for the replacement property; and
- all proceeds received on sale of the relinquished property must be used to purchase the replacement triple net lease property.
- Begin sale process to relinquish (first) property
It is key that net cash proceeds, after closing costs and debt are paid, from the sale of the relinquished property must be deposited only with the qualified intermediary, unless the transaction is a partially deferred exchange. NNN investors should bear in mind that the 45 day replacement identification period begins on the day at least one net lease property involved in the exchange is actually relinquished by closing out the sale.
- Finalize purchase of replacement property
Investors can now proceed to close on identified replacement triple net lease property working from the list submitted to the IRS. The IRS demands that the same exchanging entity (SSN or FEIN) must be on the relinquished and replacement contracts for properties. There are limited exceptions to this requirement.
Robert Gamzeh and his team of expert advisors at the Triple Net Investment Group have a track record of successfully closing on hundreds of properties for their 1031 exchange clients (1031 exchange in 2023). In fact, 1031 exchange triple net properties are the “bread and butter” of the team, and we welcome your query or consultation. Call 202-361-3050 today to get the best advisory for your NNN transactions.
