3 NNN Tax Advantages
As a triple-net (NNN) lease investor and property owner, it is important to understand your prospective tax advantages. The following three tax benefits may pertain to your current property or help you choose the best new property for your goals, as well as preserve capital and turn capital gains into more wealth.
No State Income Tax
A premium, “branded” location with a corporate, credit-worthy tenant, like Dollar General, McDonald’s, or KFC is primary to success. These absolute net lease tenants are strategically placed in areas with solid demographics and high visibility. They are often located in booming communities and rural locations that need their services, which offers a large nationwide selection to the triple net investor.
Why is this important? Since absolute NNN leases require little to no involvement from the landlord, it may fit with your goals to buy in one of the states that do not have a state income tax, no matter where you reside. Those states are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire currently taxes investment income and interest, but it is set to phase out those taxes starting in 2023. These states do not have a state capital gains tax either.
As of 2019, the “American Legislative Exchange Council reports that over the past decade the states without a personal income tax have consistently outperformed the states with the highest income taxes in GDP growth, employment growth, and in-state migration.” This lends itself to a more likely recession-proof NNN investment and spares a large amount of capital from income tax.
A 1031 Exchange – Deferred Capital Gains Taxes
Want a tax-deferred incentive to buy a triple net lease property and preserve your wealth? Think of a 1031 exchange as an interest-free loan from the government! Section 1031 of the IRC allows you to “exchange” profits, or capital gains, from the sale of one commercial property into a similar investment property – tax-deferred – within six months of the sale of your old property. You must identify the new “like-kind” property, which by IRS guidelines is all property purchased for investment purposes, in 45 days of selling and close within 180 days total.
Therefore, if you are within the 1031 timeline, you would have no problem exchanging an apartment building for a fast-food restaurant, dollar store, pharmacy, or other triple net commercial investment. Keep in mind, to avoid capital gains tax, you must invest 100% of the proceeds from the sale of the old property and the one you buy must be equal to or greater in value.
A Few §1031 Rules
One of the most important things to remember about a 1031 exchange tax advantage is that the money you would’ve thrown away in capital gains taxes is instead working for you. You can make a larger down payment on your new property or perhaps use the money to buy two properties. However, to defer 100% of the taxes, you must satisfy all three requirements of the Equal or Greater Investment Rule.
- You must reinvest all the cash you make on the sale.
- The sale price of your replacement property or properties must be equal to or greater than the price of the property you sold.
- The debt on your new property must be at least as much as the debt on your old property.
Other rules and recommendations include:
- The property you sell and the property you buy must be used in a trade, business, or for investment purposes.
- You have 45 days after you sell to identify or buy the new property or properties you intend to purchase.
- The sale proceeds from your original property must be handled/held by a qualified intermediary and not by you or someone representing you; usually a title insurance company.
- You may identify up to 3 properties as possible replacements for your old property.
- If you choose to identify more than 3, their combined value cannot exceed 200% of the value of the property you’re selling.
- You must own your new property within 180 days of the sale of the old property or by the due date for your tax return for the year in which the transfer of the old property takes place, whichever arrives first.
- Any profit from the original sale if not reinvested in the new property will be taxed.
More NNN 1031 Exchange Considerations
Though this tax code has been outlined for this article, there are many intricacies and other laws that need to be considered and followed. An experienced buyer’s advisor can help you with the complex process and details like how to choose an intermediary according to the US Treasury Department Guidelines, title requirements, the many different types of exchanges beyond what’s here, financing, and more.
Westwood Net Lease Advisors advocates the 1031 exchange for triple net lease properties to maximize your investments and diversify your portfolio. Our expert advisors can help you with the details and make it simple to utilize this tax advantage for your next investment. To learn more about the depth of the process and the 1031 exchange timeline, download our eBook: Westwood Net Lease Advisors’ Exclusive Guide on Triple-Net Leases and 1031 Exchanges.
“After wasting 40 days with countless online brokerage firms and local contacts, I still could not find a desirable property to purchase. I was ready to give up and throw my money away paying more taxes than necessary. However, within 2 hours of discovering Westwood Net Lease Advisors, I was facing a different problem. I had to decide which property to buy and where to fly for a site visit! I had 3 solid choices and ended up buying a Walgreens in Miami, which has proved to be my best asset. One phone call to Westwood Net Lease Advisors saved me $467,000.” − Billy Thomas, Mississippi
Cost Segregation Depreciation
As a NNN lease investor, you may benefit from a cost segregation study (CSS) and the cost segregation depreciation (CSD) tax law that drastically accelerates depreciation of certain building expenses. A CSS identifies and reclassifies costs, normally depreciated over decades, into a much shorter depreciation period, and frees up capital for other investment opportunities.
Based on the property and individual tax variables, money spent on non-structural CapEx improvements such as carpet, indoor and outdoor lighting, heating and cooling systems, and landscaping may be depreciated over five, seven, or 15 years, versus 27.5 or 39 years.
This substantially shorter depreciable tax life – possibly an immediate 100% write-off the year of purchase – helps you preserve capital, realize immediate cash flow, and achieve significant tax breaks on new and existing buildings. These benefits are also gained through asset reclassification and write-offs when the asset is sold.
The Benefits of CSD
- Adjust the timing of deductions to maximize tax savings.
- Reduce/defer current tax liability.
- Increase cash flow.
- Take the entire adjustment (100% on buildings purchased after September 2017) in the year the CSS is completed.
- Re-claim deductions dating back to 1987 without having to amend tax returns.
- Create an audit/paperwork trail that satisfies the IRS’s audit techniques guide (ATG).
How to Utilize the CSD Tax Benefit
The only way to determine if your triple net lease property qualifies for the maximum CSD benefit is to have specialists with engineering, architecture, construction, and tax accounting expertise perform a CSS. To satisfy the IRS’s strict guidelines, it’s imperative that your CSS be performed by a highly accredited firm that determines the cost estimates and allocations in accordance with the law. This also ensures you don’t leave any money on the table.
Cost Seg Study on New & Existing NNN Properties
It is routine to have a CSS completed when purchasing a new building but most investors aren’t aware that a CSS may also be performed on a building owned for many years – new deductions can be taken back to 1987 without amending tax returns. A study is also advantageous when you finish new construction or complete redevelopment or renovation of an existing building.
Before you purchase a triple net lease property, Westwood Net Lease Advisors can make a CSS part of your initial analysis to determine if the CSD is viable and makes the purchase worthwhile. We work with reputable CSS preparers with referenced credentials and expertise – we would be happy to connect you and help you with the process.
It is important to note that if you currently own commercial property, consult your CPA about your individual tax situation and whether CSD would work for you on the properties you own.
To Wrap It Up – NNN Tax Benefits Preserve Capital & Increase Wealth
NNN lease investments offer many tax benefits in addition to a reliable monthly income and a steady, long-term return. The tax codes described here incentivize you to preserve capital and reinvest in various commercial properties, thereby creating a healthy economy, which also diversifies your portfolio, and ultimately, increases your wealth.
The Westwood Net Lease Advisors team specializes in 1031 exchange and cost-segregation tax codes, vast nationwide market relationships, and complete transaction expertise. We provide objective advice, education, knowledge, and advocacy – all without any cost to you! Our advisors can help you with the details and make it simple to utilize the tax laws for your next investment. Contact us today for a no-obligation consultation – we’re here to help. 314-997-5227
