Commercial real estate investors, if you are planning to sell investment properties and use a 1031 exchange to re-invest, now is the time to start the process so you can get the transaction closed by December 31, 2022.
Why is this important? The White House has proposed a change to Section 1031 like-kind exchange rules that could start on January 1, 2023, if passed. This reform limits the tax deferral amount to a maximum of $500,000 for a single taxpayer or $1 million for married taxpayers.
Therefore, if you are considering trading up from one commercial real estate property to a triple net lease property, supply is low, demand is high, and it can take months to close the transaction, so start the process as soon as possible – before you sell your current property.
What Are the Current 1031 Exchange Rules?
Currently, the 1031 exchange allows you to invest the profits from the sale of one or more investment properties into similar or “like-kind” and often more valuable properties within 180 days, and defer 100% of the federal capital gains taxes, possibly indefinitely.
√ All properties in the exchange must be investment properties.
√ There is no limit on the federal capital gains deferral.
√ Within 45 days of the closed sale of your original property, even if the day 45 is a Sunday/holiday, you must choose a qualified intermediary and provide your QI a written list of potential properties you wish to purchase.
√ You can choose up to 3 properties without regard to total cost.
√ If more than 3, the total value cannot exceed 200% of the old property’s value.
√ You must buy at least 95% of the combined value of all property you list as replacements.
√ Your new level of debt must be equal to or greater than the level of debt on the old property.
√ You must own the new property within 180 days (not 45+180 days) of the sale of old property, or by your tax return due date for the year the exchange takes place, whichever arrives first.
√ Profits from the sale not reinvested in the new property are taxed as “boot.”
√ There is no limit to how many 1031 exchanges you can perform in your lifetime.
A 1031 exchange provides the opportunity to trade one or more underperforming, costly, or high-maintenance investment properties for more productive properties that are better suited to your current and future needs, such as low- or no-maintenance triple net lease investments.
Which Properties Can be Traded in a 1031 Exchange?
The IRS considers “like-kind” to be any “real” income-producing property in the United States. For example:
- You can trade an apartment complex for a ground lease
- You can trade raw land for a retail property.
- You can trade a gross-lease property for a triple net lease property.
- You can trade a rental home for a warehouse or industrial facility.
- You can trade a triple net lease property for one or more of the same.
As long as the property you’re selling isn’t your primary residence (see exception here), it is likely you can utilize the benefits of the 1031 exchange to diversify your CRE portfolio.
To learn what’s involved in performing a 1031 exchange, be sure to read our blog, “Step by Step Instructions to Completing a 1031 Exchange” and download our easy-to-reference 1031 Exchange Timeline guide.
1031 Exchange Triple Net Lease Property Inventory is Low
Due to the financial strength and resiliency of essential retailers, fast-food restaurants, medical clinics, and early learning centers in the face of continued economic uncertainty, individuals who typically invest in the stock market and those who own high-maintenance properties are re-investing in stable, single-tenant, triple net lease properties.
This is creating a shortage of available triple net lease inventory, which is furthered by 1031 exchange buyers who must purchase a property fast to fulfill their exchange and are often willing to pay a premium to lock up. This makes it more challenging to find publicly listed properties and close 1031s in the IRS’s timeline. That’s why it’s best to begin the process now, before your current property is sold, to close on your new investment property by December 31, 2022.
Engaging a specialized 1031 buyer’s advisor who knows the triple net market well, who is well-known in the marketplace, and has access to pre-market and off-market properties, will help you overcome challenges, efficiently close your 1031 exchange, and purchase the most ideal property for your financial goals.
Triple Net (NNN) Benefits
- A history of stable growth in all economies, even in a pandemic and recession.
- A low barrier to entry, with many properties starting in the $1M range.
- Corporate-guaranteed, long-term leases that provide monthly income for 10–20 years.
- Financial institutions are eager to lend for these “essential” business properties.
- Opportunity to raise an advertised cap rate from 5.00–6.50% to 7.00–10% IRR.
To Wrap it Up – Start the 1031 Exchange Process Now So You Can Reap the Full Tax Deferral for 2022
For many, a 1031 exchange, where it is possible to defer many thousands of dollars and sometimes millions of dollars in federal capital gains taxes, is a financial tool to assist with a stable retirement. For business owners, 1031 exchanges can help with scalability, growth, and exiting the business. High-maintenance property owners also rely on the 1031 exchange to transition into a hands-off ownership model. And for many others, the 1031 exchange is a means to re-invest in the economy while earning a secure monthly income for upwards of 10–20 years.
Whatever your reason for using the 1031 like-kind exchange, if you don’t want to deal with the uncertainty of next year’s tax reformation and would like the peace of mind knowing you can defer federal capital gains taxes fully, it’s best to start the process now.
To ensure you can use the full tax deferral, complete all 1031s by midnight, December 31, 2022.
When you engage Westwood Net Lease Advisors to assist with your 1031 exchange, we spend quality time with you to ensure we find just what you’re searching for, from the pre-property search all the way through closing, and walk you through the 1031 exchange process for a stress-free transaction, at no cost to you. Our goal is to get you into the strongest, most profitable investment and help you reach your financial and lifestyle goals. Contact us for a no-obligation conversation today. 314-997-5227