Jonathan Schiffer – 7/7/2023
When it comes to real estate investing, two concepts that are often discussed are 1031 exchanges and triple net (NNN) investments. These strategies provide investors with unique advantages and opportunities for wealth creation. In this article, we’ll explore what a 1031 exchange is, how it can benefit investors, and why NNN investments are a safe and secure replacement option.
The Basics of 1031 Exchanges
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to defer capital gains taxes by reinvesting the proceeds from the sale of one investment property into the purchase of another like-kind property. This powerful tax-deferral strategy enables investors to preserve their equity and potentially increase their investment returns.
3 Benefits of 1031 Exchanges
- Tax Deferral: One of the primary benefits of a 1031 exchange is the ability to defer capital gains taxes. By reinvesting the proceeds into another property, investors can delay their tax obligations and keep more capital working for them in a new investment.
- Portfolio Diversification: 1031 exchanges provide investors with an opportunity to diversify their real estate portfolio by exchanging properties in different asset classes, locations, or sectors. This diversification can help mitigate risk and enhance long-term returns. Investors can also exchange into tax-friendly states like Florida & Texas, where there is no personal income tax.
- Wealth Preservation and Compounding Growth: By deferring taxes, investors can retain a larger amount of capital to reinvest, allowing for potential compounded growth over time. This can significantly boost an investor’s overall wealth-building strategy.
Introduction to NNN Investments
Triple net (NNN) investments are a popular choice for real estate investors seeking stable and passive income streams. In an NNN lease, the tenant pays their base rent, while also assuming the responsibility for property taxes, insurance, and maintenance expenses, resulting in a hands-off investment for the property owner, commonly referred to as “Mail-box money”.
3 Benefits of NNN Investments
- Reliable Cash Flow: NNN investments offer long-term, stable cash flow. Since the tenant is responsible for all of the property-related expenses, the investor can enjoy a predictable and consistent income stream. Additionally, NNN leases often involve national or corporate tenants with strong credit profiles, who are more likely to honor all lease obligations.
- Minimal Landlord Responsibilities: In an NNN lease, the tenant takes on the responsibilities of property maintenance, repairs, and expenses, relieving the investor of any management duties. This allows investors to have a more hands-off approach and focus on other investment opportunities. In most cases, investors can also take accelerated or bonus depreciation on NNN investments to offset other real estate related income sources.
- Hedge against Inflation: NNN lease agreements typically include rent escalations tied to inflation or fixed annual increases. This feature helps protect the investor’s income stream against the eroding effects of inflation, maintaining the purchasing power of rental income over time.
Combining the benefits of 1031 exchanges with the safety and stability of NNN investments can be a winning formula for real estate investors. The ability to defer taxes and reinvest in NNN properties with creditworthy tenants provides a reliable and passive income stream while preserving and growing wealth. However, it is important to conduct thorough due diligence, consult with professionals, and carefully evaluate individual investment opportunities to ensure they align with your investment goals and risk tolerance.
RealSource Group has assisted the majority of their private and institutional clients take advantage of the 1031 Exchange, and invest in completely passive, NNN investment properties nationwide.
Disclaimer: This article is for informational purposes only and should not be considered as financial, tax, or legal advice. It is recommended to consult with professionals to determine the suitability of any investment strategy or transaction.