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NET LEASEHOLD INTERESTS: "EXCELLENT §1031
REPLACEMENT PROPERTY OPPORTUNITIES"
A LEASEHOLD INTEREST CAN BE CONSIDERED "LIKE-KIND" PROPERTY
Leasehold interests may be either relinquished property or replacement
property in an exchange. [Reg. §1.1031 (a)-1 (c) (2)] A leasehold interest
with a remaining term of 30 years or more is considered "like-kind" property
to a fee interest in any other real estate held for productive use in a
trade or business or for investment. If a leasehold has an unexpired term of
less than 30 years, it is not treated as a qualifying §1031 property.
However, if the lease provides for optional renewal periods, these periods
can be included in determining whether the leasehold has 30 years or more
remaining. In one case, a lease with an initial term of 5 years and ten
optional renewal periods of 5 years each was held to be "like-kind" property
since the taxpayer had the right to use the property for up to 55 years. [R
& J Furniture Co. v. Comm., 20 T.C. 857 (1953)]
GROSS VS. NET LEASEHOLD INTERESTS
A gross lease often obligates the lessor only to pay a portion of expenses
of the leased property. A net lease (often referred to as a net, net, net or
NNN lease) requires the tenant to pay, in addition to the fixed rent,
expenses of the property such as taxes, insurance, utilities, maintenance,
etc. The obvious advantage of a NNN lease to property owners is that many of
the routine management burdens of ownership are the responsibility of the
tenant.
WHY EXCHANGE INTO LONG-TERM LEASES AS §1031 REPLACEMENT PROPERTIES?
Many real estate investors have accumulated substantial real estate
portfolios over a period of many years. In many instances, these investors
have performed a §1031 tax deferred exchange into replacement properties.
The exchange transaction has allowed them to eliminate the payment of
capital gain taxes and rollover equities into larger and better performing
properties. Now that they have met many of their long-term investment
objectives, they desire to increase their monthly cash flow and
simultaneously reduce the management problems typically associated with most
real estate investments. An ideal solution is to exchange into a net
leasehold interest, providing excellent cash flow with very few
responsibilities associated with the ongoing management of the property.
ADVANTAGES OF NET LEASES
(1) Predictable cash flow, typically with standard cost-of-living
adjustments already built into the lease.
(2) Tenant typically is a well-recognized national company, often with
audited financial statements which can be thoroughly reviewed by the lessee.
(3) Very few management headaches. Lessor is responsible for taxes,
utilities, maintenance and insurance.
(4) Allows a real estate investor to take advantage of an income stream
without triggering the recognition of capital gain taxes.
Back to Table of
Contents 1031 Exchange Information
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Unless otherwise stated square footage and lot dimensions appearing herein are
derived from county records and may or may not be accurate.
If square footage is material to a transaction a survey or other measurement is
recommended. This information deemed reliable but not guaranteed. Current or
previous year’s taxes may not accurately forecast future property taxes.
Property taxes can increase from one year to the next for various reasons.
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