Talk to an Advisor

NNN Are Excellent 1031 Replacement Property Opportunities

Published on: June 23, 2021

A Leasehold Interest Can Be Considered Like-Kind Property

Leasehold interests may be either the relinquished property or replacement property in 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 fewer than 30 years, it is not treated as a qualifying 1031 tax deferred exchange 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 a “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 the 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 roll over 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 Leasehold Interests

  • Predictable cash flow, typically with standard cost-of-living adjustments already built into the lease.
  • The tenant typically is a well-recognized national company, often with audited financial statements which can be thoroughly reviewed by the lessee.
  • Very few management headaches. Lessor is responsible for taxes, utilities, maintenance, and insurance.
  • Allows a real estate investor to take advantage of an income stream without triggering the recognition of capital gain taxes.

Authored By:

1031 Investment Advisor

Nate oversees the daily operations, business development, and strategy for 1031 Exchange Place. He became interested in real estate from a young age due to his father's influence. After earning his real estate license at 18, Nate worked in the 1031 industry, focusing on business development through a unique white-labeling model. Following a religious mission in Taiwan, he continued in the industry until the 2008/2009 real estate crash. During the downturn, Nate pursued entrepreneurship and marketing, working with startups and outdoor companies. As the 1031 market recovered, he returned to work with his father, aiming to provide a more personalized experience for clients. Nate is passionate about outdoor activities and spends his free time with his wife and four sons, enjoying fly fishing, skiing, backpacking, rock climbing, and riding dirt bikes.