1031 Exchange

3 Benefits of NNN Properties as an Investment Option

A triple net (NNN) property is an attractive investment option for investors.   These are typically single-tenant retail properties leased to tenants with high credit ratings on “net, net, net” terms (hence the NNN acronym).

The NNN structure will provide a consistent income flow with minimal management obligations for you.  In a NNN lease the investor’s only responsibility could be collecting and depositing their rent check!

If you are thinking about investing in a NNN property, you, the investor, should consider the following benefits:

  1. Passive Investment
    Typically the tenant is responsible for all real estate taxes, insurance and all maintenance.
  2. Predictable Revenue Stream
    Because all property-related expenses are the responsibility of the tenant, the investor’s net cash flow is protected from fluctuations in expenses.
  3. Portfolio Diversification
    NNN properties provide many of the same benefits as investing in other real estate classes.

Of course, no investment is risk free, including NNN properties.

NNN properties are an appealing option for investors seeking steady returns with minimal management responsibilities but are not immune from risk.  To learn more about popular tenants for this property type, contact Doug Shea, at INCO Commercial today!

The Language of 1031 Exchange

Language is a powerful thing — so much so that being well-versed in the parlance of a given field is absolutely necessary for success.

Think about it. Would you expect to have a coherent conversation with your surgeon about an upcoming procedure if you didn’t know the names of your body parts? Of course not! The same holds true for complex financial procedures such as the 1031 Exchange, where you will want to know the specific definitions of words and phrases. After all, it’s your money that’s on the line!

So here are some important definitions / descriptions related to the 1031 Exchange process; knowing these will enable you to avoid finding yourself at a linguistic disadvantage when it comes to performing one.

Definitions Related to the 1031 Exchange Process

1031 Exchange: A 1031 Exchange refers to the “swapping” of one investment, asset or business for another, with the majority involving real estate transactions. While in other instances this practice would be taxable as a sale (and you would pay it immediately), this provision allows investors to defer them — legally — instead. With this practice, the property you exchange for (i.e. the one you’re giving up) is relinquished prior to the acquisition of your new property.

Like-Kind Property: Your ability to perform a 1031 Exchange depends on whether or not what you’re exchanging for is of “like kind” in relation to what you’re giving up. Properties that have the same / similar nature and / or character (regardless of differences in grade or quality) generally meet this description. Remember though, as it regards to personal property, the definition of “like-kind” becomes much more restrictive.

Exchanger: The property owner who is seeking to defer his / her capital gain other income tax via utilizing an IRC 1031 Exchange.

Relinquished Property: The “old” property that is being divested or sold by the exchanger / investor.

Replacement Property: The “new” property that is being acquired or  purchased by the exchanger / investor.

Qualified Intermediary: The person or entity that facilitates the exchange for the exchanger / investor. Similarly used terms include exchange facilitator and exchange accommodator. Note that to become a qualified intermediary, the exchange facilitator must meet the criteria spelled out in Treas. Reg. 1.1031(k)-1(g)(4)

Exchange Period: The period during which the exchanger / investor must acquire the replacement property in the exchange; it starts on the date the relinquished property is transferred and ends on the earlier of these: 180 days after this action or the exchanger’s tax return due date (including extensions) for the year of the relinquished property transfer.

Sources

https://www.ipx1031.com/wp-content/uploads/2013/11/IPX1031BriefExchanges.pdf

 

1031 Exchange Checklist

The 1031 Exchange is a versatile tool that helps real estate investors defer their capital gains tax. It also functions as a means for dumping under-performing assets (among other benefits).

So, it’s no surprise that you’re considering this convenient option. However, while in this exploratory phase, you need to make sure you’ll be qualified and prepare to initiate one when the time is right.

To this end, we compiled this list of questions you should be asking.

  • Do I currently own real estate property?
    The most commonly exchanged asset is real estate property. Some caveats are that properties can’t be an investor’s primary residence; a personal residence would not qualify for a 1031 Exchange. Property must be one that they currently own. Any property you’re exchanging — and exchanging for — must be for investment or business use. So, the first questions to ask are: 1. Do I currently own property? 2. Does that property meet this description?
  • Is there a capital gains or recaptured depreciation tax?
    The main reason for initiating a 1031 Exchange is to defer the taxes you will pay. As such, the next question you should ask is if there will be a capital gains or recaptured depreciation tax levied when selling your existing property. If not, the 1031 option makes little sense.
  • Am I aware of other types of property that qualify for exchange?
    Significantly, your ability to perform a 1031 Exchange isn’t limited to owning real estate property. In other words, many other types of holdings — again, so long as they are owned for “investment or business use” — qualify for an exchange. These include: land, various types of commercial property, vacation homes, ranch / farm land, and even aircraft.
  • Am I aware of these two critical requirements?
    As investors get closer to initiating a 1031 Exchange, there are two critical requirements they need to know. The first is the 180-day timeframe, which is when you must complete your 1031 Exchange transaction (including the conveyance or receipt of title to all of like-kind replacement properties) no later than:

    (1) midnight of the 180th calendar day following the close of the relinquished property sale transaction – or – 
    (2) the due date of your Federal income tax return for the tax year in which the relinquished property was sold, including any extensions of time to file.

    Furthermore, the property you are exchanging for must be of equal or greater value (debt and equity) than the property you’re selling.
  • Do I know other reasons for 1031 Exchange?
    Other reasons for performing a 1031 Exchange include: resetting an investor’s depreciation schedule, increasing their cash flow and enabling portfolio diversification.

 

Sources:

http://www.atlas1031.com/hs-fs/hub/36861/file-304337518-pdf/docs/three_qualifying_questions_-_091313.pdf

The 1031 Exchange “Like-Kind” Requirement

At Inco, we’ve aimed to enhance your 1031 Exchange acumen through a series of articles detailing the entire process. Through these efforts, we’ve brought our investor’s attention to key terms and timelines, including the history of this section in the tax code.

The reason behind our approach is simple: providing clients with a clearer understanding of investment options aids better decision making. After all, we are talking about your hard earned dollars — so why take unnecessary risks?

In the present installment, we underscore the importance of knowing another key concept, the “like-kind” requirement, because a thorough understanding of it can make all the difference.

What Property Qualifies for Like-Kind Exchange?

When considering a 1031 Exchange, it’s important that you first understand the “like-kind” qualification, which states that the property you’re exchanging for must be of the same nature, character or class of the property you’re selling. What this effectively means is that the two properties must also be of “equal or greater value” (debt and equity).

These requirements can be fulfilled (most simply) by performing a simultaneous swap of one property for another. Furthermore, both of the properties (i.e. the one you’re exchanging and exchanging for) must be held for use in a trade or business or for investment purposes.

What this means is that any property used primarily for personal use, such as an investor’s personal residence or second home / vacation home, would not qualify for like-kind exchange treatment.

Real vs. Personal Property

1031 Exchanges aren’t limited to real property; in fact, personal property can also qualify as an exchange property, under Section 1031 of the U.S. tax code.

Just remember that real property is never considered “like-kind” to personal property; in other words, you can’t exchange a car for a home. Moreover, when it comes to personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property.  As a practical example, a car cannot be considered as a like-kind to a truck, and therefore, you can’t exchange the two.

Property Excluded From 1031 Treatment

In addition to understanding the types of property that qualify for like-kind exchange and the distinction between real and personal property, we recommend that our clients know the property types that are excluded from 1031 treatment.

Here’s a helpful list of assets / property types that cannot be applied to a 1031 Exchange:

  • Inventory or stock in trade
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Certificates of trust

What Comes Next?

We hope that this information has augmented your understanding of the 1031 Exchange’s like-kind requirement. If you have additional questions or would like to discuss the details further, give us a call today at (562) 296-1362.

Sources:

https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031

The INCO Commercial Advantage (No Tax Option)

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Come learn how to negotiate around the questions of:

  1. I don’t want to pay the tax
  2. I would like some money in my pocket without placing it all in a 1031
  3. My kids will inherit this
  4. I don’t have a charity that I want to give to, to help alleviate the tax burden.

Jim Normandin is going to give us these answers and more! We will also be having some guests that are interested in INCO Commercial and the tax advantage. Sign up for our next meeting.

The 1031 Exchange: Trend or Here to Stay?

When it comes to your investing pursuits, your sights are firmly set on longevity— or staying power. In fact, that’s the reason you chose real estate over the other alternatives, like the stock market. The flexibility that comes with processes like the 1031 Exchange only re-enforces the belief that real estate investing is your own personal path to prosperity.

But are these investor-friendly options a mere flash in the pan designed to spike interest, or are they here to stay? After all, we’re talking about your hard-earned money here, so you’d like some certainty! So let’s explore the staying power of the 1031 Exchange.

Why 1031 Exchanges Are a Long-Term Investing Solution

1. The NAR Element: There’s a very powerful element behind the 1031 Exchange’s success: the National Association of Realtors (or NAR). Consider that the NAR is America’s largest trade association (at over 1.1 million members) and maintains a heavy Washington lobbying presence. These facts allow any doubts regarding the 1031 Exchange’s staying power to dissipate. In other words, because the 1031 Exchange is in the interest of its members, the NAR is interested in seeing it succeed! And in 2016, $45.2 million of their money was invested in making sure that options like the 1031 Exchange would continue to be present within the U.S. tax code.

2. 96 Years And Counting. Does a process that’s been around for about 100 years sound like a trend? Consider that the original 1031 Exchange was legislated into law with the Revenue Act, way back in 1921! The investor favorite was based on the premise that: “a property owner who re-invests his/her sale proceeds and retired debt into a like-kind replacement property has an economic position that has not changed.” It’s been helping investors dump their failing assets and expand their portfolios with more promising properties ever since.

3. $3.2 Billion (With a “B”)! Lest you think that either the presence or profitability of the 1031 Exchange option is waning, consider the following: The estimated value of total taxes deferred from the 1031 Exchange— in 2012 alone— was $3.2 billion.

4. The Anti-Stock. Unlike stocks, 1031 Exchange’s aren’t a “hot” option that stays hot only as long as a given product does. This is an important distinction, because as the popularity (and sales) of a product can fade, so can the value of its stock. Take the case of Skull Candy (or SKUL)— a trendy brand that was on the rise a few ago— only to see its stock drop by 52% over the course of a few months. A 1031 Exchange, on the other hand, holds its value year round, each time you go to perform it. In this sense then, you can say that it’s the anti-stock.

5. It’s Not Going Anywhere! Despite the usual rumors and D.C. intrigue, there’s no hard evidence to suggest that the 1031 Exchange is going away. In fact, eliminating its provision in the tax code would only hurt the real estate market. This, combined with the fact that we have a decidedly real estate-centric president means that the 1031 Exchange is likely to be a viable option for investors for years to come.

In summary:  The 1031 Option is perfect for the aging of America.  The management of the multi-family or the multi-tenant retail is very management intensive.  Is this something that you will want to hand over to your children?  The Triple Net 1031 is a way to keep real estate without the tax burden or the management headache.

Sources:
https://www.nar.realtor<https://www.nar.realtor/>
http://www.atlas1031.com/blog/1031-exchange/bid/77929/1031-Exchange-History
http://www.nasdaq.com/article/investors-beware-of-trendy-stock-cm204309

 
 For more information, contact Doug Shea, INCO Commercial.

The Reverse 1031 Exchange

In previous articles, we detailed the intricacies of the 1031 Exchange, as well as the various interests invested in its success. Of particular note were the option’s: 1). convenience to real estate investors and 2). status as a tax-shelter. Below, we discuss a variation on the original that’s likely to pique your interest— the Reverse 1031 Exchange. But first, let’s perform a quick review of the original option.

The 1031 Exchange: a Brief Review
A 1031 Exchange basically refers to a “swap” of one investment, asset, or business for another; and most involve exchanging various forms of real estate.

While in other instances this practice would be taxable as a sale (and you’d have to pay those taxes immediately), if the exchange falls under section 1031 of the tax code (i.e. it qualifies as a “like-kind exchange”), you’re able to defer them.

Also of note, as it regards this option, is how the property which you are exchanging for (i.e. the one you’re giving up) is relinquished prior to the acquisition of your new property.

Aiding Your Long-Term Investing Goals
Clearly, this option plays to investors’ long-term goals by allowing them the flexibility to:
1. get rid of under-performing assets.
2. generate greater amounts of income.
3. build larger portfolios.

But what about the lesser-known Reverse 1031 Exchange option? What’s in it for you?

The Reverse 1031 Exchange

The Details

The Reverse 1031 Exchange is the opposite of its original version (or the “Delayed Exchange”). Whereas the latter requires investors to relinquish their property(ies) before acquiring any new one(s), the reverse option allows for the acquisition of new property (ies) first (while the relinquishing can come after). This distinction is a subtle but important one, as we shall see.

The Benefits

  1. Ability to take advantage of changes in the marketplace (like buying a hot property that’s only available for a limited time).
  2. Helps if you want to relinquish your existing property, but lack a buyer.
  3. A way to avoid the IRS requirement that says the new property must be identified within 45 days of the old one’s closing.

However, the Reverse option is not without its own set of rules and requirements, which should be studied carefully beforehand.

Who Should act
As stated previously, 1031 Exchange’s are geared toward investors who crave convenience, tax benefits, and portfolio growth; so if you’re best described as an investor who detests “staying pat” while preferring to stoke the fires of their ambition, this option may be a good fit. The Reverse 1031 Exchange only serves to give you added flexibility when it comes to meeting your investing goals. So let the wheeling and dealing begin!

Sources:
http://www.1031exchange.com/reverse/

http://ronwebster.com/content/1031-exchanges-dummies

http://www.exeter1031.com/reverse_1031_exchange_overview.aspx

Four 1031 Exchange Mistakes People Make

A valid 1031 property exchange is the selling of an investment property with the intention of reinvesting the profits into a new property to defer capital gains taxes. These transactions allow you, the investor, to continue investing in other properties without losing your investment equity to taxes.

These are the four common 1031 Exchange mistakes people make:

  1. Not having enough in depth analysis of the existing property and tenant.
  2. Closing the sale on your property without choosing a qualified intermediary.
  3. Having no plan in place to acquire the  replacement property.
  4. Not being familiar with the 1031 Exchange Time Constraints.

For a free 1031 Exchange guide and for more information, contact Doug Shea, your Tax Deferred Specialist  at 562-773-4000 or email dshea@incocommercial.com

The 1031 Tax Exchange

What is a 1031 Tax Exchange?

As an investor, it’s important to stay sharp on the facts when considering any changes to your investment portfolio. One of the smartest moves you can make is to structure a 1031 Tax Exchange. In this article, INCO Commercial reviews the details of a 1031 Exchange and how it can benefit you.

The 1031 Tax Exchange, also known as a ‘Starker Exchange,’ allows an investor to sell a property and reinvest the proceeds in a new property. In doing so, all taxes on capital gains are deferred. The official wording states:

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

A delayed 1031 Tax Exchange occurs when the exchangor relinquishes his property before acquiring new property. The property the exchangor owns is first transferred, then the property the exchangor wishes to own is acquired second.

A successful exchange requires strict adherence to the guidelines outlined within the tax code.

There are four basic requirements when entering into a delayed exchange. It is crucial to review these under the counsel of a tax accountant or attorney to guarantee proper adherence to the tax code. INCO Commercial is ready to help you make arrangements and assist you each step of the way.

Property Qualifications

The internal revenue code requires that the properties involved in an exchange must be held for productive use in trade or business or for investment, and they must be “like-kind”.

Like-kind simply means that if two assets or properties are considered the same type, an exchange between them would be tax-free. However, the like-kind requirement is often a source of confusion for investors. All real estate is technically like-kind, with the exception of property outside the United States. For example, an investor selling a rental home in the U.S. can exchange into a multi-plex, provided that it is also located in the U.S. Similarly, an investor selling a warehouse can exchange into a percentage interest in an office building. However, the line is drawn with dealer properties, which are ineligible for a tax exchange.

A dealer property, or property held as inventory, is one purchased with the intent of “flipping,” or turning around quickly. While most real estate purchases are considered “investments,” the IRS makes the final determination whether the property is a longer-term investment or a dealer property.

The most important factor in determining whether a property is dealer property or not is “intent”. Upon an audit, the IRS will carefully examine what the investor intended to do with the property at the time of acquisition. This can include a review of the type of mortgage, what kinds of improvements were made, correspondence relating to the property, the type of insurance coverage, etc.  If the IRS determines that the intent of the investor was to quickly resell the property, it could be considered dealer property and thus ineligible for exchange.

Timeline

The IRS provides a maximum of 180 days to complete an exchange.  The timeline begins upon the close of escrow (COE) of the relinquished property. The replacement property (or properties) must be acquired on or before midnight of the 180th day; there are no exceptions. Additionally, the IRS requires that all potential replacement properties be identified by midnight of the 45th day.

If the replacement property/ies can not be acquired on or before day 180, the exchange is null and taxes must be paid.

Identification Rules

Identification of all potential replacement property is required on day 45 of the exchange.   Identification must be in writing and the description of the properties must be unambiguous.  The IRS provides two rules for identifying replacement property:

  • The 3 Property Rule – The 3 Property Rule allows for identification of any three properties of any price anywhere in the United States.
  • The 200% Rule – The 200% Rule is an option for identifying more than three properties.  With the 200% Rule, four or more properties can be identified, however the combined value of all properties identified can not exceed 200% of the property sold. For example:
    • Investor sells a rental home for $500,000. Investor can identify ten $100,000 rentals, five $200,000 rentals or any combination of properties, provided the aggregate value does not exceed $1,000,000.

Tax Deferral Requirements

To defer 100% of the capital gains tax liability, two requirements must be met:

  1. Reinvest all the cash generated from the sale of the relinquished property
  2. Purchase property equal or greater in value to the relinquished property.

The two requirements listed above can be accomplished in a variety of ways. For example, an investor selling a $500,000 rental, with $200,000 in equity, can purchase two $300,000 properties with a $100,000 down payment on each.

A partial exchange is also possible. This can occur in a trade down situation, where the replacement property is of less value than the relinquished property (i.e. sell for $500,000, buy for $400,000).  A partial exchange will result in a partial deferment of the tax liability.  Some, but not all of the taxes will be owed.

Property-related tax management can be a daunting task, especially with the strict code enforcement. Having a strong team with years of industry experience is not only crucial, but can relieve some of the stress on your end.

INCO Commercial is committed to ensuring our clients accomplish their objectives through our quality commercial real estate brokerage and advisory services. Explore our website, visit our contact page, you can reach out to Doug Shea at 562-773-4000 for immediate assistance.

 

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