One of the most effective and proven ways to increase capital and receive a stable income is to invest money in real estate. But at some point, the investor decides to sell the property. In this case, a rather serious problem arises – capital gains tax. Because of this requirement, the amount of profit received may be significantly lower than expected.

But there is an excellent way that will allow you to avoid additional taxation. This is a special mechanism of 1031 exchange. If you compare various commercial real estate properties, then Triple Net Lease can rightly be called the most profitable and attractive for 1031 exchange. Today you will learn about what are the advantages of a triple-net lease and why they are regularly chosen by investors. After all, their main goal is to minimize the tax burden and receive high passive income.

The concept of 1031 exchange

First, you need to understand what a 1031 exchange is. This is a special tax mechanism, thanks to which investors have the legal opportunity to sell one commercial real estate property and buy another. But most importantly, they do not have to pay immediate capital gains tax.

There are several key conditions for using this type of exchange:

• the new property must be equivalent to the previous one;

• the transaction is concluded within a strictly established time frame;

• the proceeds from the transaction must be reinvested in another property or asset.

As for the time frame, the investor is given 45 days to choose a new property and 180 days to complete the transaction.

This mechanism opens up an excellent opportunity to postpone paying taxes and use the entire amount received after the transaction to purchase a new asset. This increases the investment potential for investors.

What you need to know about Triple Net Lease

Triple Net Lease objects are commercial properties where all maintenance costs are paid by the tenant. The owner of this asset receives all the necessary rent payments, but does not pay for insurance, repairs and maintenance, as well as property taxes.

This provides an opportunity to receive passive income. At the same time, the owner does not need to manage the property. Often, the tenants of such real estate are large companies and organizations that enter into a long-term agreement. On average, from 5 to 25 years.

Why Triple Net Lease is ideal for 1031 exchange

There are several key advantages of this format of transaction with commercial real estate.

1. Minimal risks and expenses. One of the main advantages can rightly be called the absence of additional costs for servicing the property and not only on the part of the owner. For example, if these are office buildings and apartment buildings, the investor is required to be financially responsible for the operation of these facilities. In the case of Triple Net Lease, this does not need to be done. Accordingly, such commercial real estate properties are ideal for generating passive income.

2. Long-term lease. Such properties are mainly leased for a long rental period. Most often, this is 10-25 years. In this case, the tenants are large, reliable and reputable companies. This means that the investor will receive guaranteed income for many years. This advantage is especially important for those who use the principles of 1031 exchanges for investing.

3. Liquidity. Such objects are in high demand among investors. This is due to the ability to receive a stable and long-term income stream. At the same time, such objects are easy to sell if necessary. This factor is important to consider in the long term and planning to use 1031 exchanges in the future.

4. Simple management. Compared to investments in the hotel business, multi-apartment residential buildings, Triple Net objects do not require active participation from the owner. This makes the acquisition and management of such objects for investors as profitable and simple as possible. You do not have to deal with operational activities. Instead, you can receive a stable and completely passive income.

5. Wide variety. Another undeniable advantage of Triple Net is a large selection of objects. This category includes several types of real estate, including shopping malls, stores and retail centers, gas stations, pharmaceutical chains, office buildings, etc. Therefore, the investor gets an excellent opportunity to independently choose which of the objects suits him best. In this case, he can focus on the risk level indicators and the projected income.

Given these advantages and opportunities, investing in Triple Net is rightly considered one of the most profitable and effective solutions for those who plan to use 1031 exchange for subsequent sale and reinvestment in a new asset.

Criteria for choosing a suitable property

If you have made a final decision to invest in a Triple Net property to take advantage of a 1031 exchange, then you should consider several key selection criteria and recommendations.

1. Tenant analysis. First, conduct a comprehensive analysis of the company that is the tenant. It is important to consider the company’s financial stability indicators, current credit ratings, and reputation. This will minimize the risks in the future receipt of stable passive income.

2. Tenant solvency. The undeniable advantage of this type of property is the ability to receive stable passive income over a long period. But this advantage directly depends on how solvent the tenant is. Therefore, it is necessary to choose those properties that are large representatives of national or regional business. Good examples include drugstore chains, chain stores, fast food restaurants, etc.

3. Location. The preferred choice will be those properties that are located in areas with a high traffic rate. In addition, consider stable economic growth, the presence of developed or developing infrastructure. Sometimes it makes sense to think about investing in properties that are located in new areas. In a few years, they can become much more profitable and the investment will be fully justified.

4. Rate of return. Compare the current capitalization rate with the potential return on your investment in this property. This will allow you to understand what expected profit you will receive in the short and long term.

5. Lease terms. It is important to consider the term of the lease agreement, the terms under which the parties can extend the agreement. In addition, it is necessary to take into account the possible indexation of rental rates.

6. Agreement structure. Be sure to make sure that the property you choose fully complies with all the rules and criteria of Triple Net. This way, you are guaranteed to be able to avoid additional and unwanted expenses and financial losses.

7. Duration of the contract. Analyze the period for which the lease agreement is concluded. Long-term contracts are considered the most profitable in such a situation. Therefore, give preference to those companies that offer to conclude a deal for 10-25 years. This will provide the most predictable income and minimize potential risks. Short-term leases of up to 5 years will be less profitable and will require additional manipulations, finding new tenants, renewing contracts, etc.

8. Payment structure. Conduct a detailed assessment of how the lease payments will be calculated. In some cases, annual indexation is possible. Therefore, analyze in advance how, how much and for what it will be necessary to make lease payments, how profitable and convenient it will be for all parties. It is also important to make sure that the payment structure is fully consistent with the selected type of transaction.

9. Prospects for value growth. It is important for the investor to assess the prospects for growth in the value of the property they have chosen. Even if you receive a stable income through rent, it is imperative to take into account the further prospects for an increase in the market value of the asset.

You should always approach the choice of property thoroughly and consider all the factors that can affect your passive income, potential expenses and the overall investment performance indicator.

Final thoughts

In practice, 1031 exchange is rightly considered a powerful and effective tool in tax planning. With its help, investors get an excellent opportunity to maximize capital and passive income indicators.

At the same time, Triple Net Leases are the best objects for using such a mechanism. This is due to such factors as high stability, liquidity and minimal need for participation from the owner.

By choosing the right property and following the recommendations for analyzing the property for investment, you will be able to manage your assets as much as possible and minimize tax liabilities.

If you are studying the possibility of a 1031 exchange and you are interested in Triple Net objects, then the right decision would be to contact professionals. Experienced consultants will provide you with useful and necessary information, help you choose the most suitable options. This way you will conclude a deal on the most favorable terms.

Related Articles

100% Bonus Depreciation Retroactive for Gas Stations and Car Washes

Triple Net Lease Sale-Leaseback Opportunities: A Win-Win for Sellers and Investors