We recently blogged about the use of IRS 1031 as a preferred strategy for active real estate investors that wish to defer their capital gains liability. In its current form since 1986, a “1031 exchange” is a guideline for selling one qualified property and then buying another qualified property within a specific period of time. While a “1031 exchange” enables investors to reinvest funds which otherwise would have been paid to the IRS, the specific timeline for compliance with IRS 1031 is often problematic. It’s not often likely an investor can identify a suitable exchange property following the sale of an asset within the 45 days allowed by the IRS.
Case in point: We’re currently working on the sale of a New York apartment building, and our client’s goal is to purchase an even larger building with the proceeds of the sale. The tax-deferred advantages of IRS 1031 are evident, but there’s always the possibility that the client will not find the perfect apartment building in time to comply.
At times like these, we provide our clients with an inventory of net-leased single-tenant properties for sale. These properties are typically characterized by their long-term leases to national credit tenants and require zero management on the part of the investor. Because the market for net-leased properties is more liquid than other real estate asset types, they are increasingly popular as an intermediate step in a “1031 exchange” strategy. An investor may acquire a net-leased property for a period of time to satisfy IRS 1031 while continuing the search for the desired property.
Of course, many investors seek out net-leased single-tenant properties in their own right. Investing in long-term leases with strong credit tenants provides a relatively risk-free strategy for out-performing the low yields offered by money markets and government debt. And with most net-leased investments, the tenant is obligated to pay all of the expenses associated with the operation and management of the property.
While it’s easy to see the benefits of a “1031 exchange” combined with a net leased single-tenant property, it’s vital to follow the roadmap laid out by the IRS and the find the ideal property to make it work. That’s where we come in. With offices in New York, Massachusetts and Connecticut, our investment sales team has deep experience with the “1031 exchange” process and net leased single-tenant properties. If you’re a property owner or an investor in the mid-market segment and want to discuss strategy in more detail please give us a call. We look forward to hearing from you.