Commercial Real Estate Investing has three main purposes to achieve the goals of most investors.
- Preserve the commercial real estate investors’ capital or equity.
- Create favorable cash on cash returns annually.
- Diminish the tax consequences for the cash flow and the capital gains tax at the end when selling.
How Do Commercial Real Estate Investors Really Perform?
The 1031 rule created by the IRS years ago, allows the commercial real estate investors to be able to delay or prevent a capital gains tax on a potential profit when selling a real estate investment or income property or properties. The Starker Exchange terminology is just another way of stating the 1031 exchange process using a different term.
Trading one property for another, not being your own residence and making sure your equity and your debt, if any, matches with the new purchase price or exceeds the old property value but not by over 200% of its value in most cases, is crucial to avoid paying a future tax on profits. Hiring an intermediary to handle the trade and not touching the proceeds of the sale is also paramount in the process.
Triple net property or properties (nnn property) is one important asset group to consider trading into for numerous reasons. Usually stable credit single tenant paying you a nice return without the headaches of management, repairs or taxes and insurance is greatly acknowledged as an easy solution replacing apartments and multiple tenanted buildings.
The depreciation benefits allowing greater cash on cash net returns without the tax is also wonderful. Hopefully you select a tenant that has increases in their rents to offset inflation and create more value in the future.
The typical fast food or retailer is the triple net option that comes with good credit and takes on the responsibility of the building and its associated expenses.The investor is hoping that the new triple net (nnn) tenant will stay indefinitely, remain in business and provide income for years to come without aggravation.
The normal capital gains tax on the profit with a sale can be avoided with the 1031 trade process or starker exchange if done correctly. Typical rules are 45 days after the sale to identify potential replacement properties usually three or less and not to exceed 200 percent of the original sale value.
The investor has 180 days to close on the new property or less to avoid paying a tax. Getting a qualified intermediary to transaction the exchange is CRUCIAL.
Hiring a company such as Westwood Net lease Advisors to guide you through the process from start to finish is most likely your best solution not to make mistakes in purchasing or selling the investment properties. You always have to be guided by a real estate attorney and CPA in addition to make sure all legal issues are covered.
