According to a study, recent, proposed but not final, Opportunity Zone legislation is the most powerful piece of real estate legislation since 1031 Starker exchanges were created in the 1920s! Opportunity Zones are a creation of the 2017 Tax Cuts and Jobs Act, geared to injecting investments in economically depressed areas. There are about 10,000 opportunity zones in rural, suburban and urban areas throughout the United States. These investment zones have the ability to positively impact the lives of more than 40 million people in specified Opportunity Zones in all states of the Union.
Though these changes in the law may or may not favor net lease investors directly yet, there is still the indirect or spillover effect of investment activity. Investment activity breeds more investment potential, and initial investment, be it in a convenience store, gas station, pharmacy, bank or casual dining restaurant, always attracts NNN investor interest, which can result in economic expansion and additional lease-up of commercial NNN triple net lease real estate in a metropolitan statistical area.
Now let’s talk about the 1031 tax-deferred exchanges. Conventionally, 1031 exchange investors are just seeking to defer any taxable gains on the sale of triple net lease NNN property. For e.g., partners decide to sell an NNN net lease property investment. Should they decide to reinvest the proceeds into another NNN net lease investment property via a 1031 Starker exchange, they will collectively have to continue to reinvest those gains.
However, changing Opportunity Zone rules may allow such the aforementioned 1031 partners to decide individually whether to reinvest their sales proceeds into the next investment or not. Whilst, 1031 Exchanges are a great tool if the intention is to hold NNN investment property for the long term(NNN investor interest). However, if NNN net lease investments have already significantly appreciated and are ripe for disposal, now or within a few years, it may be worthwhile to consider instead an Opportunity Zone investment.
Investments in Opportunity Zones will have to meet IRS standards, and one of those standards is that at least 50 percent of the total gross income of the business comes from the active trade or conduct of a business. And therein lies a wrinkle for triple net lease NNN investors! Since NNN leases have historically been classified as passive—rather than active—investments, a passive triple-net NNN investor may not qualify – so far.
Should the IRS decide so, there are some exciting benefits in the opportunity zone structure that could accrue to future NNN net lease investors: First, and most appealing, an NNN property investor could reinvest initial capital gain into an opportunity zone fund investment, and further hold that investment for at least 10 years! Thus, any appreciation that accrues over that period of time would be tax-free at the time of future sale of the NNN investment property. Second, a 15% increase in basis equal to an investor’s initial gain. A third potential benefit is the deferral of an initial tax liability until Dec. 31, 2026.
To understand and navigate the murky yet exciting opportunities for net lease NNN triple net property investors in Opportunity Zones, call your trusted brokers at the Triple Net Investment Group, today.
