The tax deferred 1031 Exchange is the facility offered by the United States Internal Revenue Code. It allows the real property owner or the exchanger to defer the tax on capital gains incurred from a property sale. For this, the owner requires to purchase a like kind property having equal or higher value to that of the relinquished property. In the subsequent purchase, the owner utilizes all the cash equity.
Here, like-kind property refers to the property of similar class, character or nature. For instance, a vacant property bought for investment purpose qualifies to be a like-kind property to retail property, which is held for doing business.
For hassle free 1031 exchange deal, it is wise to involve a Qualified Intermediary as the professional does all the paper work on your behalf. In addition, this third party can also act as an independent escrow agent for funds associated with the property exchange.
Excluded from Section 1031 exchange treatment include:
- Stock or inventory in trade
- Stocks, bonds, or notes
- Other debts/securities
- Interests of Partnership
- Trust Certificates
Methods of investments in NNN 1031 Exchange Property
NNN property or Triple Net property is the most popular type of property in the domain of commercial real estate for 1031 exchange buyer. The deals associated with NNN are ideal as they set the tenant free from management responsibilities. In addition, they also ensure long-term lease, lucrative financing, constant cash flow and long-term lease to the tenant as other notable benefits. Here are the three methods to invest in the NNN 1031 exchange property.
- The Three Property Rule, The most common mode is to identify three properties having unlimited value.
- The 200% of Fair Market Value Rule, The second method is to identify unlimited properties whose total fair market value remains less than 200% of the properties sold in the exchange.
- The 95% Exception Rule, The last method involves identifying three or more properties with combined fair market value exceeding 200%, The exchanger must acquires a minimum of 95% of the fair market value of all the identified replacement properties
- You can defer paying tax on the realized gains with 1031 exchange
- You can rebuild your equity by dispose existing properties and investing on new ones.
- Lower depreciation schedule for exchanger when investing in new properties
- In case you exchange property instead of selling it, the exchanger losses incurred on the income tax return will remain aloof from deduction.