Not all commercial property investments are hands on or require maintenance.
For many investment property owners, the thought of transitioning into commercial real estate can be daunting due to the perceived management requirements. However, this need not be the concern that it is. Tax-deferred 1031 Exchanges offer many options to reinvesting in commercial properties that do not require the day-to-day “hands on” management typically associated with real estate investments. There are two particularly appealing options; net leased properties and Delaware Statutory Trusts (DSTs).
A Tax-deferred 1031 Exchange, named after Section 1031 of the IRS Tax Code, allows investors to defer capital gains taxes on an investment property when it is sold, as long as another investment property is purchased with the proceeds of the sale. This is a powerful tool for those looking to shift their investment focus without incurring immediate tax liabilities.
Net Leased Properties: An Ideal Choice for Hands-Off Investments providing strong, passive income.
For those investors who want to maintain control by “staying liquid” with their assets, net leased properties are a prime example of no management, no landlord responsibility investment assets. In most cases, the tenant is responsible for most, if not all, property expenses including real estate property taxes, insurance, and maintenance. Commonly referred to as triple-net leases (NNN), or now more commonly referred to as “absolute net leases”, where these lease forms relieve the property owner of the troublesome landlord responsibilities like regular day-to-day maintenance and management. Investors receive a regular income stream without the typical headaches associated with property management.
The stability of net leased properties, coupled with long-term leases to national credit tenants, provides a stable and steady rental payments that provide excellent cash flow, including regular rental increases – a key component of a successful commercial real estate investment strategy. These assets are often leased to well-established businesses that operate dozens, if not hundreds of locations nationwide, which adds more peace of mind, while reducing most potential risks.
With a triple-net leased property, the tenant is responsible for the majority, if not all, of the maintenance, taxes and insurance expenses related to the real estate. Investors utilizing a 1031 exchange often directly purchase NNN properties, which typically are retail, medical or industrial facilities occupied by a single tenant.
Delaware Statutory Trust (DST) – Providing Diversification
For those looking for even more diversification and ease of management, Delaware Statutory Trusts provide an excellent option. A DST is a legal entity created as a trust under Delaware law that can hold on to multiple real estate investments. When you invest in a DST, you are essentially buying a fractional, undivided interest in a portfolio of properties, spreading out risk and increasing potential for returns.
This transaction is a securities transaction and requires the investor to be accredited.
Investing in a DST allows individuals to own a piece of significant real estate portfolios – like large apartment complexes, industrial parks and shopping centers and many others, without the management duties usually associated with such properties. Additionally, DSTs are eligible for 1031 Exchanges, providing an excellent avenue for investors seeking to defer capital gains taxes while potentially enhancing their investment portfolios through access to high-quality commercial real estate.
In contrast to the example above, where you buy the whole property yourself, Delaware Statutory Trusts (DSTs) are a form of co-ownership that allows diversification and true passive investments. In a 1031 Exchange scenario, you can invest proceeds from the prior property sale into one or more DSTs to achieve diversification.
DSTs often hold institutional-quality properties. (An example would be a 1200-unit multifamily building located in a secondary market, or a student housing facility). A DST may hold one or more properties occupied by single tenants operating under long-term net leases, such as a FedEx distribution center, an Amazon distribution center, a self-storage portfolio or a portfolio of dialysis centers. DSTs can be one of the easiest replacement property options to access because the real estate already has been acquired (in most cases, sometimes the sponsor may have the asset tied up, but not yet acquired while they are still in the capital raise phase) by the DST sponsor company that offers the DST to investors.
Other Possible Exchange Options
In addition to those mentioned, there are other options you may consider depending on your specific investment criteria, including short and long term financial goals, including Tenants In Common (TICs) Cash Out or Qualified Opportunity Zone Funds.
Investment in commercial real estate does not always mean becoming entangled in complex management and maintenance issues. Through vehicles like net leased properties and Delaware Statutory Trusts, investors can enjoy the benefits of real estate ownership but without the management responsibilities. For those considering a tax-deferred 1031 Exchange, these options are worth exploring as they offer both tax efficiency and a hands-off investment experience.
If you are an investment property owner who is interested in a no obligation, private consultation, please visit www.Best1031Online.com, or contact James Bean
of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031
or email at [email protected].
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All information is deemed to be accurate, and not advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors.