Best Options For A 1031 Exchange Property
Section 1031 Exchange of the Internal Revenue Code permits a tax-deferred exchange of any real property in the United States against a like-kind property if the property is being utilized for investment. For example, a single-tenant property is eligible for a 1031 Exchange against a multi-tenant property.
IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or investment.”
1031 Exchange Property Guidelines
1031 Exchange guidelines provide tons of flexibility in structuring deals to broaden a real estate investment portfolio or otherwise satisfy strategic goals. For example, let’s suppose that an owner of the interest in an office building decides to trade that for a new like-kind property by taking the benefit of 1031 Exchange. Under 1031 exchange rules, you may exchange the building for a triple net leased investment in which one corporate tenant accepts all management responsibilities while you receive a monthly income. To be eligible for non-recognition of gains under an Internal Revenue Code Section 1031 exchange, commonly known as a like-kind exchange, both the properties, one that you let go (the relinquished property) and the property which is acquired (the replacement property) must be involved in productive purposes for a business, trade or investment. This is often addressed as a qualified purpose requirement.
As per the standard definition, a personal residence is not being used for business, trade or investment; therefore, it does not satisfy the qualified purpose requirement. However, a property which is partially being used as a residence and a part of it is being used for commercial purposes does qualify somewhat. Whether in the case of relinquished property or replacement property, none of them could be a personal residence to be eligible for a 1031 Exchange Also, owning a house only with the expectation that its value might go up does not classify as a smart investment.
The primary inquiry is one’s intention when a replacement property is acquired. If you genuinely aimed to treat it as 1031 Exchange property and not to occupy it as a primary residence, then you are on the right track.
1031 Exchange Options
There are countless investment solutions using which an investor can increase their potential wealth and secure a better financial future. Some investors are knowledgeable and experienced to choose the right option after carefully weighing the benefits and disadvantages. For others, however, the experienced direction of an investment broker is necessary.
A Tenant-in-Common (TIC) investment is primarily used in the real estate sector. The TIC vehicle permits a small club of investors to co-invest in a real estate property. One of the main benefits of setting up investment as a TIC is that the members may take advantage of specific tax implications and maintain equity in their venture. Many investors prefer this system rather than forming a limited liability company or another business entity to control the real estate.
During the 1990s, tax-deferred 1031 exchanges surfaced as an outstanding new real estate industry. Individuals who favored this option would approach and pool funds from investors to obtain real estate. An investor engaging in the pool could group their investments and establish replacement property more efficiently to warrant that they got continued capital gains tax deferment status.
Another benefit that TIC investments allow is the capability to spend 1031 exchange funds immediately following the sale of the previous property. Also, the investors do not own accountability for the day-to-day supervision of the investment. Moreover, pooling resources among investors allow each investor admittance to higher-grade investment possibilities that they would contrarily be unable to reach.
Triple Net (NNN) Property
The most common way real estate investors make revenue is by leasing out their property. Although there are various kinds of leases, the “triple net” (NNN) lease is preferred for its simplicity. In a triple net lease, the tenant is liable for property taxes, insurance, and maintenance. This places the burden and unpredictability that can attend all three of those expenses squarely on the tenant rather than the owner. Double net (NN) leases are similar. They typically leave repairs or maintenance to ownership, although the specific details may vary from lease to lease. Investors sometimes prefer NN leases for newer properties, as the risk of repair may be low, or maintenance may be minimal, while rental incomes are typically higher.
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.
For consultation and assistance regarding 1031 exchange call – 888-876-6005 or email us at firstname.lastname@example.org