Real estate investors can use a 1031 Exchange to defer capital gains taxes. By reinvesting proceeds into like-kind properties, they can retain more capital and grow their portfolios. Below are the seven key rules and necessary timelines for completing a successful 1031 Exchange.
1. The Property Must Be “Like-Kind”
The properties must be “like-kind” in nature or character. They do not need to be identical. For instance, selling an office building and buying an apartment complex is acceptable. This flexibility allows investors to diversify their portfolios with different property types.
2. The Property Must Be for Investment or Business Use
Only properties used for investment or business purposes qualify. Personal residences do not. Eligible properties include rental homes, commercial buildings, and investment land. Properties meant for quick resale or “flips” do not qualify under this rule.
3. Replacement Property Must Be of Equal or Greater Value
The new property must have an equal or greater value than the one you sell. This ensures you defer all capital gains taxes. If the replacement property is worth less, the difference becomes taxable. This rule encourages real estate investors to reinvest in higher-value assets.
4. Avoid Receiving Boot
Boot refers to any financial gain from the sale. Receiving boot will result in a partial capital gains tax. To defer all taxes, reinvest all proceeds from the sale into the replacement property. Avoid receiving boot by ensuring the new property’s value equals or exceeds the sold property’s value.
5. Title Must Be in the Same Name
The title of both the relinquished and replacement properties must remain the same. If you own the sold property individually, the replacement must also be in your name. If a company holds the title, the same company must hold the new property. Continuity in ownership is essential for the exchange to qualify.
6. Identify Replacement Property Within 45 Days
You have 45 days to identify one or more replacement properties after selling your original property. The properties you identify must meet the like-kind criteria. Careful planning is essential because missing this deadline disqualifies you from the exchange.
7. Close on the Replacement Property Within 180 Days
You have 180 days to close on the purchase of your replacement property after selling the original. This timeline overlaps with the 45-day identification window. Failing to close within 180 days disqualifies the exchange, making the capital gains taxable.
45 days to identify: You have 45 days to identify potential replacement properties.
180 days to close: You must close on the replacement property within 180 days of selling the original property.
These timelines are strict, so planning is crucial for success.
Why Choose a 1031 Exchange?
A 1031 Exchange lets investors reinvest capital without paying taxes immediately. This helps portfolios grow faster. Reinvesting 100% of the proceeds enables you to acquire more valuable properties. It also allows for repositioning assets, such as exchanging a management-intensive property for a more manageable one.
Conclusion: A Smart Tax Strategy for Real Estate Investors
The 1031 Exchange is a powerful tax-deferral tool for real estate investors. By following the seven rules, investors can defer taxes and grow their portfolios more efficiently. Consulting a real estate professional or tax advisor is recommended to ensure compliance and optimize the benefits of the exchange.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com Let us help you stay ahead in the market!
As a tenant or business owner looking to lease commercial real estate (CRE) property, you hold a position of advantage. CRE property owners or landlords often seek you out, employing strategies to entice you to sign a lease or renew an existing contract. These strategies typically include incentives, which can serve as attractive perks.
In a competitive market, landlords use incentives to present their properties in the best light. However, while these incentives may seem appealing, they require careful consideration to avoid potential drawbacks. It’s wise to hire a real estate broker or lawyer to examine the agreement before you sign.
Types of Rent: Face Rent vs. Effective Rent
Before exploring the various lease incentives available, it’s essential to understand the two types of rent: face rent and effective rent.
Face rent refers to the baseline payable amount, excluding incentives. In contrast, effective rent represents the total rent after accounting for all incentives. Effective rent is the actual amount you’ll spend on the property and is the figure to compare with other properties on your list. These rent types also help calculate the total savings a tenant can generate over the lease period.
Common Lease Incentives
There are numerous incentives in the market, but the three most common ones are the rent-free period, rental rate reduction, and fit-out contribution.
Rent-Free Period
A rent-free period, also known as abated rent, allows tenants to occupy the property without paying rent for a specified time. This incentive is often offered during the first few months of the lease, providing significant cost savings. It’s particularly beneficial for newly established businesses, as it helps generate sustained cash flow during the initial operations.
However, it’s crucial to remain cautious when considering this incentive. Thoroughly review the lease agreement and consult professionals to ensure the arrangement doesn’t result in long-term disadvantages.
Rental Rate Reduction
A rental rate reduction involves negotiating a lower lease rate, either for a specific period or throughout the lease term. Deciding whether to opt for a rent-free period or a rental rate reduction depends on which option offers greater savings. When making this decision, consider factors such as annual rent increases, market stability, and negotiations with the property owner.
Fit-Out Contribution
A fit-out contribution, also known as a tenant improvement allowance, involves the tenant and property owner sharing the costs of space improvements. This incentive may cover maintenance costs, fixture installations, and other enhancements. Typically, it operates on a reimbursement basis, with the property owner covering a percentage of the total costs.
Before proceeding with this incentive, tenants usually need to provide the following:
A duly signed commercial lease contract or agreement
Required insurance documentation
Receipts for all identified expenditures for reimbursement
A bank guarantee or security deposit
Detailed plans for the work, subject to landlord approval
When negotiating a fit-out contribution, both parties should clarify terms such as:
Ownership of the completed fit-out, either fully or partially by the tenant or landlord
Whether the landlord must provide an ‘incentive guarantee’ to cover the incentive
The mode of payment, whether on a reimbursement basis or another method
Additional Lease Incentives
Aside from the three common incentives, landlords may offer other perks, including:
Cash payments
Cash-convertible benefits like cars or equipment
Fixed rent rates that don’t increase during the lease period
Reimbursement of relocation costs, penalties, or legal fees
Free furnishings and equipment
Incentives for exceeding lease liabilities or low-value equipment
Compensation for inconvenience caused by refurbishment
Interest-free loans
Holiday packages
Pay-out of a tenant’s pending lease commitment to another property
Incentives given to tenants, such as cash, are often considered taxable income. However, if provided during the initial stages of a business, the incentive may be classified as capital and thus exempt from tax. Incentives like reduced rent or entertainment packages, such as holidays, are also typically non-taxable.
Repayment Clauses
One of the most critical reasons to thoroughly review a lease agreement before signing is the presence of repayment clauses. Some agreements include sub-clauses requiring tenants to repay a portion of the incentives if the lease is assigned, surrendered, or terminated before expiration.
Fit-Out Ownership
Tenants should clarify the ownership terms regarding fit-out improvements. It’s essential to specify the roles and duties of both parties concerning fit-out taxation and ownership, particularly upon lease expiration.
Incentive Disclosure
Finally, never hesitate to seek professional assistance when reviewing lease agreements and negotiating terms. It’s better to be safe than sorry. Remember, a lease agreement is a legal document, and your signature legally binds you and the landlord. Although lease incentives can be enticing, don’t let excitement lead to hasty decisions that could result in undesirable consequences or financial loss.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
Recent trends in the commercial real estate world might make leasing seem less attractive. Low-interest rates have made purchasing more affordable, and skyrocketing property values make ownership appear enticing for those seeking appreciation. Additionally, changes in lease accounting standards are removing some financial benefits of leasing. However, despite these factors, leasing space can still be the best option for many businesses. Let’s explore why leasing might be the right choice for you.
Leasing is Often Less Expensive Than Buying
The first reason to lease space is that it is usually less costly than buying. While leasing requires some upfront costs like deposits and tenant improvements, these are much lower than the down payment and reconfiguring costs involved in buying a building. Finding small, high-quality standalone space is also difficult, especially if your company needs a specific type of space, like a Class A high-rise or an industrial building with unique features.
Leasing Offers More Options
Leasing often gives businesses more space options, especially in central business districts, where most office spaces are available for lease. While suburban markets may have more properties for sale, they often consist of large, vacant campuses or small neighborhood offices that may not meet your company’s needs.
Leasing Provides Flexibility
Leasing offers more flexibility than ownership. You can quickly adjust to your business’s changing needs when your lease expires. Selling a building can be time-consuming and costly, especially if you’re not willing to lower the price. Leasing allows you to move and adapt your space as your business evolves.
Leasing Means Fewer Maintenance Responsibilities
Another advantage of leasing is the ability to leave building problems behind. If a space needs major improvements, you can move to a new location and let the new landlord handle the repairs as part of the move-in concession package. If you own the building, you’re responsible for fixing its problems, which can be a significant financial burden.
Leasing Helps Build Community
Leasing space in a shared building also provides community benefits. You can connect with other businesses in the same building, building relationships that can simplify vendor networks and even reduce employee turnover. These locational benefits are harder to achieve when you own your building and are more isolated.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
Commercial leases are lengthy and can be daunting to read. However, it’s crucial to carefully review every part of the document before signing. While all parts of a commercial lease are important, certain areas require special attention. Let’s explore the key terms you should focus on when reviewing a standard commercial lease contract.
The lease term significantly impacts your business. A longer lease often secures a lower monthly rent since landlords prefer tenants who commit long-term. This reduces their need to renegotiate or fill vacant spaces frequently. However, if you expect your business needs to change soon, a shorter lease might be better. You don’t want to pay fees for unused space or face costly penalties for breaking the lease early. Including a sublease clause can provide flexibility in case your business changes before the lease ends. This allows you to rent out any unused space to another tenant.
Rent and Security Deposit Terms
Understanding how much you’ll pay is critical. Don’t just focus on the monthly rental rate. Be sure to review if and when rent increases, and by how much. Also, check for any additional fees, such as operating costs passed to you as the tenant. Find out what allowances, if any, are provided for improvements to the space. Additionally, pay attention to the security deposit. Sometimes, you can negotiate out of paying a deposit by providing a letter of credit from your bank.
Premises Terms
Many business owners overlook the terms of the premises in the lease. This section outlines exactly what space you’re renting. For instance, if you’re only leasing part of a building, ensure the contract includes access to shared areas like parking, storage rooms, lobbies, and conference rooms.
Use Terms
The use terms detail what you’re allowed to do in the space. This section may contain restrictions on the type of business you can run. For example, other tenants in the building may have clauses that prevent direct competitors from leasing nearby. This could limit your ability to expand into new business areas later. Furthermore, the use terms typically include rules for signage and advertising. Keep in mind that the first draft of a lease will likely favor the landlord. However, you don’t have to accept those terms as-is. Landlords expect negotiation, so don’t hesitate to request adjustments that benefit both parties.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
A commercial lease can seem intimidating, especially if you don’t deal with real estate regularly. However, reading your lease carefully is crucial to ensure you secure the best deal for your office space. While every part of the lease is important, certain terms and clauses need extra attention.
Rent and Common Area Maintenance
To avoid any surprises when it’s time to pay rent, it’s essential to review the rent terms thoroughly. Ensure you understand any additional fees beyond the base rent. When is the rent due, and how must it be paid? Familiarize yourself with penalties for late payments and check how much you’ll need to pay for common area maintenance. This fee should also clearly define what it covers, so there are no surprises later.
Right of First Refusal
If you want to remain in the office space when your lease ends, you should ensure a right of first refusal clause is included. This clause gives you the first opportunity to renew your lease before the landlord offers the space to other potential tenants. Securing this right can be vital if you plan to stay long-term.
Definition of the Premises
The definition of the premises outlines the exact space you’re renting. Make sure the square footage of your office is correct in the lease. Additionally, if your landlord promised access to shared facilities like restrooms or break rooms, these areas should also be clearly mentioned in this section. Verbal promises should be written in the contract to avoid confusion.
Subleasing and Assignment
If your business needs change, the ability to sublease or assign the space to another tenant can help reduce costs. Ensure your lease includes flexible subleasing rights, so if your business outgrows or no longer requires the office, you have the option to lease it to someone else without breaking the agreement.
Use and Exclusives Clause
It’s important to understand whether there are restrictions on the types of businesses allowed in the building. Will these limitations prevent you from expanding into new sectors in the future? Additionally, check if the lease protects you from having competitors move into the same building. This exclusives clause can be essential in protecting your business interests.
Maintenance Responsibilities
Who is responsible for covering repair and maintenance costs? The lease should clearly outline who pays for maintenance and who arranges repairs. Understanding this before signing the lease will help prevent future misunderstandings or costly disputes.
Carefully reviewing your commercial lease is essential to protect your business and avoid complications. Pay special attention to the rent, subleasing rights, maintenance clauses, and other key terms. It’s always worth negotiating or clarifying lease terms before signing to secure the best outcome for your business.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
