Know your NNN investment inside out
Are you tired of getting reminders for your property bills? Then it’s time to change your investment. Paying for the maintenance of your property can be troublesome after some point of time. When a property ages it requires more care and investment for its maintenance. In such a scenario, an investor has no choice but to sell out their old property and buy a new one. However, doing so results in taxation on the proceeds obtained from the sale. Whereas, on account of exchanging properties using a 1031 Exchange investors aren’t liable for paying any taxes.
Yes, that’s true. Moreover, you can also get relief from property management and defer capital gains taxes if you exchange your old property for a NNN property using a 1031 Exchange. But before we tell you how you can acquire a NNN property, it’s important that you know what actually a NNN lease means.
What does a NNN Lease mean?
A NNN lease, also known as a triple-net lease, is an arrangement in which tenants are required to pay the maintenance expenses of properties instead of the property owners. In a normal or gross lease, tenants are only required to pay the base rent of the property, while property owners are responsible for paying for its maintenance. However, a NNN lease lifts this burden from the shoulders of property owners by asking tenants to pay the additional property expenses.
NNN stands for ‘Net, Net, Net’. The reason why a NNN lease is called so is that it covers all three nets – insurance fee, property taxes, and maintenance cost. Therefore, in a NNN lease, a tenant is required to pay the insurance fee, property tax, and maintenance cost of the property along with the base rent. Whereas, in a NN lease or double-net lease, tenants are only required to cover any two additional expenses – insurance fee and property taxes – along with the base rent. As tenants are also required to pay the additional property expenses, the base rent in a NNN lease is generally less than that in a gross lease.
It’s evident that NNN investors enjoy a regular flow of income without the burden of property management, and when mixed with a 1031 Exchange, the benefits are uncountable. However, there are a few things that you must pay attention to before making a NNN investment using a 1031 Exchange.
- 45 Days Identification Period – Upon successfully closing on the sale of your relinquished property, you must identify a potential NNN property within 45 days. This time frame of 45 days is known as the ‘identification period’.
- 180 Days Deadline – You must complete your 1031 Exchange within 180 days, which starts from the day your relinquished property is sold. No extension will be given in case you fail to complete your transaction within 180 days.
- Capitalization Rate – The CAP rate or Capitalization rate is used by investors to determine the net operating income produced by a property. It is calculated by taking out the ratio between a property’s current market value and its net operating income. For example, if the current market value of a property is $1m and it is generating an annual income of $200K, then it’s CAP rate will be ($200,000/$1,000,000) = 20%. In simple words, the more the capitalization rate of a property, the greater will be its net operating income.
How you can invest in a NNN property using a 1031 Exchange?
- Enter into a 1031 Exchange agreement along with a Qualified Intermediary.
- Close on the sale of your relinquished property.
- Identify a potential NNN investment within 45 days.
- Buy the same within 180 days.
- Submit form 8824 at the time of filing taxes along with other required documents.
As you can see getting hold of a NNN property using a 1031 Exchange isn’t that tough. However, it’s recommended that you consult a good NNN investment advisor before making your investment. This is where we come to your service. We match you with experienced NNN investment advisors and 1031 Exchange experts. We also stay in touch with your attorney, accountant or closing agent for ensuring that the transaction carries out smoothly.