Wednesday, January 19, 2011

Walgreens NNN Lease as Replacement Property

Walgreens NNN Lease as Replacement Property
According to the IRS, in 2002 individuals entered into 143,184 1031 exchanges. By 2005 that number had peaked to 283,560. Everyone can guess what happened next. The market dropped - dragging investments down with it. As a result, anywhere between 59,192 and 78,923 exchanges were estimated to be performed by individuals in 2008. However, it’s likely we’ve already returned to 2002 level numbers.

Institutional investors and traditional buy-and-hold investors believe the market is improving- thus, why "sell in a soft market?". However, clients with low-basis property that have certain events (death, retirement, financial distress) trigger property sales are opting to conduct like-kind exchanges. The natural processes of the life cycle along with an improving market have forced many investors out of the trenches.

An example would be an apartment building investor retiring to Florida and swapping out of an Arlington Apartment building and buying a Walgreens NNN lease as replacement property. The client gets cashflow without the "toilets, tenants, and trash". The market may not be perfect – but time waits for no one. Many of the baby boomers who could afford to wait just a few years ago are acknowledging and accepting current realities.

Another interesting and timely example are landowners selling to energy companies drilling on their property. This low-basis acreage with no depreciation benefits is great fuel for an income-producing commercial replacement property whether it be retail, industrial, or office. These clients often do not know that their land is "like-kind" with commercial real estate, and they do not know that passive real estate investments are out there that they do not have to actively manage.

Clients should really try to plan for both capital gains events and estate events. Unfortunately too much attention is put on deductions, current income, and economics of deal. Investors now face 25-50% in capital gains taxes upon disposition and upwards of 45-55% in estate taxes. This level of taxation will erode a substantial amount of the cash you will net from an investment when attempting to build real wealth.

No comments:

Post a Comment