Tired of Being a Landlord Yet You Don’t Want a Big Tax Bill?

Anyone who has owned investment real estate, whether a student rental, a small apartment building, an office building or a strip retail center, knows that two of the most demanding aspects of being a landlord is dealing with tenants and maintaining property. For many, being a real estate investor appears a Catch-22: you want out, but to get out you must give away all or most of what you have worked for. One of the best strategies for freeing yourself of landlord hassles while deferring taxes is 1031 Exchanging into an Absolute-Net-Leased property in which the tenant maintains the building.

1031 Exchange. The IRS Code allows you to exchange one real estate investment asset for another while deferring the gain and depreciation recapture on the sale of the first property. With 15% federal capital gains tax, state taxes and the recapture of depreciation, the potential for deferring taxes is huge...particularly if you have held the property for many years. On the sale of an investment property that has been held long enough to generate significant appreciation while a significant amount of depreciation has been taken, it is not unusual for 30% to 40% of the proceeds from the sale to be paid in taxes if the seller does not 1031 exchange into another property.

The IRS Code says properties eligible for a tax-deferred exchange must be like-kind. For real estate held for investment, that gives you a lot of latitude. An apartment building you own in California can be exchanged for an office building in Colorado. Raw land can be exchanged for a fully-developed building. Your 100% ownership in the building you are selling can be divided into two or three properties to create diversification. As long as the exchange is done properly the options for tax-deferred investments are limitless.

Replacement Property. Locating and securing your 1031 replacement property must be done swiftly, skillfully and knowledgeably. The replacement property must be identified in writing within 45 days of the sale of your relinquished property. Then, the closing on the purchase of the second property must occur within 180 days of the sale of the relinquished property. The process of selecting your replacement property should begin as soon as you know you have a solid buyer for your replacement property. You do not want to wait until day 44 to begin looking, or you are likely to come up empty handed.

If you are looking to let go of the hassles associated with being a landlord, then you should focus search on Absolute Net-Leased properties. Such properties can be purchased as fractional interests (also known as Tenant-In-Common, or TIC, interests) or as ‘whole’ properties. TIC interests are available in large retail centers, multi-family housing, luxury private student housing and office buildings. Generally, you will need a minimum of $150,000 in cash and meet certain accreditation requirements in order to buy into a TIC.

‘Whole’ Absolute Net-Leased properties are often the separately-owned pad sites of larger retail centers. It could be the real estate for a Jack-in-the-Box, a Big-O Tire Store, Blockbuster Video or a Starbucks. One of the classic Absolute-Net-Leased properties for the larger buyer is the real estate for a Walgreens Pharmacy. In general, you will need $500,000 or more in cash to purchase a quality ‘whole’ Absolute-Net-Leased property.

Where to find Expertise. The 1031 Exchange is the ideal tool to move from a management-intensive property into an Absolute Net-Leased property. While you do not personally need to have all the answers, you need to know where to find them. Two essential members of your team are: (1) an investment real estate broker who can provide you with and help you evaluate various TIC and ‘whole’ replacement property options, and (2) a top-notch Exchange Qualified Intermediary, QI for short. With the right expertise, you can preserve your hard-earned equity, establish a predictable and reliable cash flow, and free yourself from getting the call when the toilet is not working.

The above article was graciously provided by Mark Casey. Mark is president of Casey Partners, Ltd. a real estate brokerage and consulting firm headquartered in Boulder. Mark holds a Master of Business Administration (MBA) from the University of Virginia. and is a member of Commercial Brokers of Boulder and the Denver Metro Commercial Association of Realtors (DMCAR). Casey Partners can be reached by calling 303-665-6000 or email info@caseypartners.com.