Make 1031 Exchanges Work for You

If you own commercial property and are contemplating branching out and acquiring more properties, you might not know where to start. A good jumping off point is understanding what type of leasing opportunities are available—and their interplay with the commercial real estate market now. Although in many areas of the country, there’s been a steady uptick in real estate development and even a boom in affluent areas where mixed-use properties are more popular than ever, some areas are still depressed and struggling. The current political climate is worrisome for some who want to expand their real estate investments. A good option is to be cautiously optimistic about building your real estate investment portfolio, while erring on the side of minimizing costs and management responsibilities.

A trend in real estate ownership over the past decade—1031 triple net (NNN) tenants in common exchanges—promises just that by bringing co-owners into the mix for a new property after an owner sells one property that is struggling or that the owner wants to let go of for other reasons. This opens the door for tax advantages for you and an easier time owning future properties that are NNN in nature.

To make 1031 work for you, you should know what you’ll need to complete your own exchange. The main requirements for a 1031 exchange are: (1) a Qualified Intermediary (QI), who should painstakingly follow all the rules until what is known as a “master lease” is entered into; and (2) qualified exchange properties—that is, “like-kind” properties for commercial use. Check the Internal Revenue Code and with an expert for a detailed list of qualified properties. Remember a key move: If you undertake an exchange, you must involve the QI prior to the closing of the sale of your current property.

If your currently held and prospective properties qualify for an exchange, your QI will handle the selling and buying of the properties, most notably, the incoming and outgoing funds involved in the exchange. At a designated point in the process, your QI will transfer the new property to you, to enter into a “master lease.”

For more details about 1031 master leases, the advantage of these exchanges, and the risks you should be concerned about, see “Explore Tax Advantages of Triple Net Leasing for Your Property,” available to subscribers here.