by Annette Cooper

Anyone who is thinking about selling a business use or investment property and has a gain or taxable recapture may want to consider performing an IRC Section 1031 Exchange. Whether the investor’s property is owned free and clear, or encumbered, the benefits of a tax deferred exchange can be significant.

Section 1031(a)(1) provides that “no gain or loss is recognized on the exchange of property held for productive use in a trade or business, or for investment, if the property is exchanged solely for property of a “like-kind” that is to be held either for productive use in a trade or business or for investment.”

In a 1031 Exchange, sometimes called a “tax free exchange”, a property owner may dispose of property and acquire another without incurring any immediate tax liability. This allows the taxpayer to keep the “earning power” of the deferred tax dollars working for him or her in another investment. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property.  But in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.

A 1031 transaction, however, must be structured in such a way that it is, in fact, an exchange of one property for another; rather than the sale of one property and the purchase of another. All requirements of Section 1031 and other sections of the Internal Revenue Code must be carefully met for a valid exchange. Further, the application of Section 1031 to a particular transaction or property can only be determined after careful study of a taxpayer’s particular circumstances and an analysis by his or her tax advisor, attorney, real estate agent and intermediary.

 Investment Grade Tenants

With the growing market of 1031 transactions, many buyers are turning their attention to single tenant, triple net properties for their replacement assets. One of the main reasons is the security of an investment grade, single tenant asset.

We focus primarily on investment grade tenants, as defined by the ratings agencies, Standard & Poors and Moody’s. We concentrate on investment grade companies due to their financial strength. As one might speculate, the stronger the tenant; the less likelihood of default or bankruptcy. The credit of the tenant affects many different aspects of an investment, including long term lease security, possible financing and asset liquidity.


Copyright: Annette Cooper

Annette Cooper, Top Ten Keegan & Coppin Commercial Real Estate Agents List, is based in Santa Rosa, CA specializes in 1031 Exchanges.