NNN properties are most often used in 1031 Exchanges.
NNN properties are most often used in 1031 Exchanges.
NNN property is real estate which the tenant leases for 10 – 25 years with the condition that tenant will bear all property costs of maintenance, insurances, taxes etc. In addition, the tenant is also liable for regular rent. In turn, the investor’s advantage in owning NNN lease property, is that the investor will enjoy a long-term and stable income with no management responsibilities.
The 1031 exchange tax rule has enabled NNN investors to defer capital gains taxes since 1927. This rule allows an investor to relinquish property and replace it with a new one, with tax deferral of associated capital gains taxes. The basic idea is the exchange of two real properties which are similar in the objective of their use for trade or business activity, or “like-kind”.
In order to make a 1031 exchange viable(1031 Exchange at Triple net ), the inclusion of a QI or Qualified Intermediary is necessary. A QI is a third person in the transaction and is independent in nature. The QI prepares, completes and files the tax and other legal documents essential to this exchange, and also holds escrow of funds involved in completing the exchange(investor’s advantage in nnn , 1031 exchange tax rule).
The 3 property selection methods used in accomplishing a NNN 1031 Exchange are:
- Three-property rule: the most common process used to identify only three properties of any combined value;
- 200% rule: identified 3 properties whose combined fair market price cannot exceed 200% of the price of the relinquished properties;
- 95% rule: identify minimum three properties whose combined fair market price is more than 200% of the relinquished properties. In addition, the exchanger will have to buy 95% of the identified properties.
Thus with a 1031 Exchange an investor can achieve:
- Tax deferral: of the capital gains associated with the sale of an investment property
- Increased cash flow: a 1031 exchange permits the use of accelerated depreciation thus increasing an investors cash flow upfront, facilitating greater rates of return
- Conservation of equity: If an exchange is planned and executed properly, then future generations will be able to defer the taxes also, and preserve equity or investment capital.
Some aspects of 1031 Exchanges to keep in mind:
- Completion Time Period: an investor needs to identify the replacement properties within 45 days from the sale of relinquished properties. However, the investor has a total of 180 days to close on purchase of the replacement property;
- Ownership of property time period: the relinquished property must be held for minimum period of 1 year prior to a completion of the 1031 Exchange;
- Exceptions: a primary residence or vacation home, not used by the owner, may qualify for a 1031 Exchange.
Use the expert guidance of your trusted advisors at Triple Net Investment Group for your 1031 Exchange, call or email us today!
