1031 Tax Free Exchange

A 1031 Exchange is not a tax loophole.  It is a code section written by Congress specifically to allow anyone who meets its requirements to sell their property and defer paying tax on the gain.  For example:  The Investor (exchanger) must have a like kind investment property to do the exchange. i.e., Investment rental property for another investment rental property or Investment vacant lot for investment rental property, etc...

The exchanger should purchase a property for a higher basis than the selling property to get the best results.  The exchanger as purchaser can leverage their investment by financing and receiving cash at settlement and gaining additional tax incentives. 

The exchanger also needs to select an attorney experienced with completing the exchange documents that are needed.  The cost to do so ranges from approximately $700 to $1,000.

(Please note: The information on this page is not intended as advise on legal or tax matters.   Talk to your financial advisor to see if a 1031 exchange is right for you.)

1031 Parking Lot

As a licensed real estate brokerage firm, 1031 Exchange Place, LC represents buyers seeking commercial replacement property in a 1031 exchange. Many times, those involved in an exchange approach the end of the 45-day identification period without a suitable replacement property. Rather than pay the tax or acquire a sub-standard property, Tax Deferred Services (TDS) has created a unique and necessary tool for the 1031 exchange market, the TDS "1031 Parking Lot."

The TDS "1031 Parking Lot" offers a money-back guarantee in order to furnish the taxpayer with options never before available. The idea is simple: You complete an exchange and defer taxation by acquiring a partial ownership (see Tenants-In-Common) interest in a TDS property while holding a money-back guarantee that buys the property back in one year. This means that you are NOT locked into a property and will NOT be subject to 'market forces' when you sell. The "1031 Parking Lot" is designed for investors who cannot find suitable replacement property within the strict 45-day identification period.

The mechanics are straightforward. When you purchase one of the designated "Parking Lot" properties, you receive a "Put" option. This option, when exercised, requires the re-purchase of your undivided interest in the property for exactly what you paid for it. This "Put" option grants investors flexibility not previously available to the 1031 exchange industry. However, the Parking Lot program still utilizes IRC 1031 and must adhere to strict guidelines in order to work properly. There are established timeframes in which the option can be exercised and the "Put" cannot be exercised earlier than one year from the original purchase date.

"Parking Lot" properties guarantee a monthly income while you hold the "Put" option. This passive investment provides investors with unrivaled freedom from the constraints of 1031 exchange regulations. The program successfully defers taxation and is the only sanctioned means of 'extending' the identification period. The "Put" option affords you the flexibility to exchange out of the TDS property to another property of your choice after one year with all of your invested money plus a monthly return. If you elect to remain invested in the property beyond the time period during which the "Put" option can be exercised, your income increases from 6% to the scheduled second year income for the given property.

The flexibility provided by this program is a benefit to taxpayers and the professionals that serve them. This unique option helps investors cope with the difficult and stressful decisions of real estate investment. Every exchanger should identify a "Parking Lot" property as a third choice 'back up.' The use of this program as an investment safety measure and as an extension of the identification period enables more exchanges to be completed and prevents the unnecessary payment of capital gains taxes.

1031 Tenants In Common

A new and innovative approach to real estate investing has appeared in recent years. An alternative to sole ownership of real estate is an investment in a single large commercial property by multiple owners, not as limited partners or as an entity, but as individual owners. Each owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. This form of ownership is known as co-tenancy or tenants-in-common ("TIC"). Each owner has the same rights as would a single owner. 1031 Exchange Place, LC represents a number of sellers of commercial properties for which partial ownership may be acquired with a low minimum investment.

A TIC Replacement Property enables the average investor to participate in an echelon of real estate previously reserved for large institutional investors. TIC Replacement Properties are chosen because they provide credit-worthy tenants, secure monthly income, stability, and growth potential. Investing in a TIC Replacement Property provides passive long-term income, eliminates active property management and alleviates the burden of being a landlord. Now the average person can own property leased to a Fortune 500 company, a national or regional retailer or the United States Government.

Advantages of TIC Ownership

1. Low Minimum Investment
   It is estimated that 50% of all 1031 exchanges involve capital amounts of $250,000 or less. The price of admission to the triple-net lease market typically begins at $1,000,000, thereby locking 50% of 1031 investors out of this arena. TIC ownership is available with as little as $50,000.
2. Diversification
   In a typical 1031 exchange, the taxpayer will identify three potential replacement properties and subsequently purchase only one. TIC ownership makes it economically feasible to identify and acquire ownership interest in three properties instead of one, thereby decreasing risk through diversification. Partial ownership of several different types of properties in several different locations can bring greater stability to future income, much as diversification in stocks minimizes risk to investors.
3. Flexibility
   By identifying a TIC Property as one of the replacement property choices, the taxpayer's entire proceeds can be applied to the TIC property if the other choices fall through, or the taxpayer can invest the "spill-over" money in the TIC property if there is money left unspent after another closing.
4. Decreased Tax Risk
   Because an investment position in a TIC property can be reserved for a period of time after the identification period, the potential for paying capital gains tax because of a collapsed deal is decreased. In addition, reinvesting all 1031 proceeds into TIC properties creates the opportunity to identify as many as 6-10 properties instead of the customary 3 during the 45-day period, putting the investor in a much more secure position for the exchange.
5. Existing Financing
   Typically, TIC properties already have financing in place and can be assumed without qualification or loan assumption fees.
6. Speed
   By eliminating the loan qualification process, credit checks and appraisal work, and because the negotiation process is eliminated, a TIC property closing can easily take place during the 45-day identification period, thereby eliminating the risk of running out of time. A TIC closing can take place within days of identification.
7. Liquidity
   Splitting the proceeds from a 1031 exchange into several TIC properties can present the opportunity for greater liquidity of assets for future cash or investment needs. If there is a debt carryover into the exchange, all the debt can often be moved into one replacement property, leaving remaining funds free for a couple other debt-free properties. It also presents the opportunity to identify as many as 6-10 properties instead of the customary 3 during the 45-day period, putting the investor in a much more secure position for the exchange. In addition, many TIC properties have buy-back provisions from the seller.
8. Simplicity
   A TIC investor receives a monthly check without having to bother with the day-to-day management of their investment.

 Triple Net Lease

A triple-net lease is one in which the tenant pays all of the ongoing operating expenses. The landlord receives a net rent, because the tenant pays the property taxes, utilities, insurance premiums, maintenance and repairs. Most net-leases are long term (10-20 years) with cost-of-living increases in the rent. Triple-net properties are considered by many to be the most liquid and secure real estate investments available. Nearly all such properties tend to sell very quickly, especially those with solid, credit-worthy tenants.

Many successful regional and national companies would rather lease the property they occupy for their trade or business, than own it. Leasing frees up corporate funds for further business expansion, rather than tying up capital in "brick and mortar." Because their company name and logo are typically on the building they are leasing, and the public perception is one of ownership, they have a vested interest in assuring the taxes are paid, the building is in good repair and the grounds and facilities are clean and maintained. Leasing the building on a triple-net lease basis gives the companies the control they desire over their physical environment without the capital commitment of ownership.

Some examples of net-lease tenants are: Walgreens, Arby's, Sherwin Williams Paint, Staples, U.S. Government, Hollywood Video, Taco Bell, Checker Auto Parts, Goodyear Tire, Barnes and Noble, Radio Shack, Microsoft, Circuit City, PetsMart, Jiffy Lube, Carl's Jr., Gart Brothers, HomeBase, Airborne Express, Hartford Insurance Co., Applebees, and Marie Calendars.

Many real estate investors own their properties as a sidelight to their full-time jobs, and have little time to devote to their real estate investments. As baby-boomers approach retirement, they seek to eliminate the hassle of active property management, and take advantage of a more passive income approach. Triple-net lease properties can provide appreciation potential as well as a secure monthly income without the landlord responsibilities normally associated with real estate ownership. Many "burned-out" landlords turn to net-lease real estate as the property investment of choice.