1031 investors often look for different opportunities to close their exchange. Though any kind of investment property can be exchanged for another under a 1031 exchange, it’s up to an investor whether they want to invest their entire proceeds in one or more property types. Sometimes, it gets difficult for 1031 investors to locate properties when required. In such scenarios, it’s quite normal if they look out for various investment opportunities. DST, TIC, and NNN Investments are a medium through which 1031 investors can close their exchange.
What is a NNN lease?
A triple net or NNN lease is a single-tenant arrangement that requires the tenant to pay all operating expenses associated with the property they’ve rented. Under a gross lease, as you may know, the tenant only pays a flat rent which is then used by the investor for paying all operating expenses. As a result, the investor needs to invest a part of their income on operating expenses. However, a NNN lease requires no such thing. While the tenant pays all operating expenses along with the base rent, the investor enjoys a regular flow of income without any liabilities.
Should you directly invest in NNN properties or do a 1031 Exchange?
Either way, you’re likely to be benefitted. It’s just that you’ll receive more benefits on doing a 1031 exchange. Let’s see, how?
Suppose, you choose to invest your proceeds into a NNN property without a 1031 exchange. By doing so, you’ll need to pay taxes on your capital gains imposed by the Federal and State governments. As a result, you’ll have to lose a part of your proceeds on taxes.
On the other hand, if you choose to do a 1031 exchange, you can defer up to 100% capital gains tax. This will enable you to invest your entire proceeds in the replacement property. As a result, you’ll be able to buy a bigger and better property.
Why should you close your 1031 exchange using a NNN investment?
Well, there are a plethora of reasons why you should invest the proceeds from the sale of your relinquished property in one or more NNN properties. A few of them are –
- No need to pay operating expenses – The biggest benefit that comes with NNN investment is relief from unnecessary expenses. As all operating expenses are covered by the tenant, all you need to do is keep records of all payments made by the tenant.
- Increased cash flow – NNN lease agreement keeps on modifying throughout the lease period, which means, there is always a scope for a hike in the rent. As the majority of NNN tenants are big established companies, the risk of default is also significantly low in this kind of investment.
- Tax advantages – The reason why 1031 investors prefer NNN investment is that it provides relief from property management along with the opportunity to defer capital gains tax when mixed with a 1031 exchange.
It’s evident that NNN investment is suitable for investors of all stature, and when mixed with a 1031 exchange, it just gets better and better.