Diana Hill
Online Trading Academy
Recently this question was submitted and got me thinking, it would be a great topic for an article.
Question: I enjoy your articles about real estate. I found myself as a real estate investor by accident. About 20 years ago I inherited a rental property from my aunt. She had owned it for around 20 years. Being younger at the time, I took over the management of the units. I made mistakes along the way (wish I’d had a resource like OTA back then) but I learned a lot. It’s been a nice source of cash flow for me over the years. It’s also an important part of my retirement plan. Here is my question; Is there something I can do with the property to not incur a huge tax bill, be less hands on and still have the cash flow?
Answer: When considering the circumstance, there are several things to be taken into consideration. Reducing the burden of owning the property, the tax considerations, and how to set things up to leave a legacy. The property is free and clear (of course except for taxes and maintenance) and it is worth around $2 million. If she simply sells the property, the income tax bill would be approximately $300,000. So, she would only have $1.7 Million to invest, reducing her income and legacy; whereas, if she uses the 1031 rules she will have 2 million to invest.
This is a strategy that can be used to address all three concerns: Sell the 40-year-old property for the $2 million and do a 1031 tax deferred exchange with the proceeds. This is one of the key ways investors maintain their wealth and move their equity into other investments (in this particular case, the property will also be newer than the one sold). In this way, it will be easy to purchase a $3 million-dollar commercial asset, but instead of a residential building she considers a building with a Triple Net Lease tenant.
What is a Triple Net Lease?
A Triple Net Lease building works like this: the tenant pays a rent which includes taxes, insurance and ALL other property repairs. This provides the owner added security of not being responsible for all the expenses. She should look for a building with an existing long term national tenant. This kind of secure tenant, along with the Triple Net Lease, will allow better cash flow, tax deductions of interest (since they will have a loan), depreciation, and it defers the taxes into the future. It’s a win, win! You can use the money now, buy a more valuable asset, start the clock again on depreciation, have limited responsibility for maintenance and get better cash flow.
What are the risks? We know all investments have risks, but Triple Net Leases historically have lower risk. According to AOA News, Triple Net Lease properties have an occupancy rate of 99.5% compared to apartments at 95% and office space at 80%.
An active investor who is looking for steady income, no management and low risk should consider doing a 1031 into Triple Net Lease. We have just touched on Triple Net Leases and 1031 Exchanges, if you want to learn more consider taking our Commercial class.
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
EUR/USD faces next resistance near 1.1930
EUR/USD has surrendered its earlier intraday advance on Thursday and is now hovering uncomfortably around the 1.1860 region amid modest gains in the US Dolla. Moving forward, markets are exoected to closely follow Friday’s release of US CPI data.
GBP/USD inching closer to 1.36
The Pound Sterling edged higher to 1.3640 on Thursday, recovering from an earlier pullback after stronger-than-expected US jobs data initially weighed on the pair. The Bank of England held rates at 3.75% at its February 4 meeting in a narrow 5-4 vote split, with four members preferring a 25 basis point cut to 3.50%.
USD/JPY sinks back below 153.00 as undaunted Yen continues to climb
The Japanese Yen strengthened past 153 per US Dollar on Thursday, rising for the fourth straight session after Prime Minister Sanae Takaichi's decisive general election victory on February 8 gave her a clear mandate to pursue expansionary fiscal policy. Markets are betting that her agenda of increased government spending, tax cuts, and a two-year suspension of the 8% food sales tax will strengthen economic growth and provide the Bank of Japan with greater scope to normalize monetary policy through additional rate hikes.
Editors’ Picks
AUD/USD: Some profit-taking should not be ruled out
AUD/USD has quickly faded Wednesday’s strong advance despite climbing to new multi-year highs around 0.7150 earlier on Thursday. The pair’s decline comes amid a marginal uptick in the US Dollar, while investors gear up for US CPI data and relevant Chinese releases on Friday.
EUR/USD faces next resistance near 1.1930
EUR/USD has surrendered its earlier intraday advance on Thursday and is now hovering uncomfortably around the 1.1860 region amid modest gains in the US Dolla. Moving forward, markets are exoected to closely follow Friday’s release of US CPI data.
Gold falls to near $4,900 as selling pressure intensifies
Gold price faces some selling pressure around $4,910 during the early Asian session on Friday. The yellow metal tumbles over 3.50% on the day, with algorithmic traders appearing to amplify the precious metal’s sudden drop. Traders will closely monitor the release of the US Consumer Price Index inflation report for January, which will be released later on Friday.
Ethereum investors face huge unrealized losses following price slump
US spot Ethereum exchange-traded funds flipped negative again on Wednesday after recording net outflows of $129.1 million, reversing mild inflows seen at the beginning of the week, per SoSoValue data. Fidelity's FETH was responsible for more than half of withdrawals, posting outflows of $67 million.
A tale of two labour markets: Headline strength masks underlying weakness
Undoubtedly, yesterday’s delayed US January jobs report delivered a strong headline – one that surpassed most estimates. However, optimism quickly faded amid sobering benchmark revisions.
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