1031 exchanges · NNN replacement property
Can I 1031 exchange into a NNN property?
The short answer
Yes, you can complete a 1031 exchange into a NNN property if both properties qualify under IRS rules. A 1031 exchange NNN property transaction allows investors to defer eligible gains when replacing qualifying investment real estate with triple net leased property.
Read the full answer ↓What 1031 exchange requirements apply to NNN property?
An NNN lease generally makes tenants responsible for property taxes, insurance, and maintenance, subject to the agreement. A like-kind property exchange generally requires both properties to be held for investment or productive business use.
According to IRS Publication 544, improved and unimproved real estate can qualify as like-kind property even when their uses differ. Qualifying 1031 exchange property types may include rental apartments, commercial buildings, vacant investment land, and single-tenant retail properties.
Example
For example, an investor may exchange a rental apartment building for a single tenant NNN property. Personal residences and properties held primarily for resale generally do not qualify.
The following table compares the requirements for a 1031 exchange into triple net property:
How does a 1031 exchange work with an NNN property?
A deferred exchange generally follows three steps:
- Engage a 1031 exchange qualified intermediary before the original property transfers.
- Identify replacement real estate within 45 calendar days.
- Acquire qualifying replacement property within 180 calendar days or the earlier applicable tax-return deadline.
Both deadlines begin when the relinquished property transfers. The IRS Form 8824 instructions explain these timing requirements.
The cost of a 1031 exchange may include intermediary fees, legal expenses, and other transaction costs. Investors should confirm these expenses before closing.
Key 1031 exchange terms
- Relinquished property
- Investment real estate transferred in an exchange.
- Replacement property
- Qualifying real estate acquired through the exchange.
- Qualified intermediary
- An independent party facilitating a deferred exchange under applicable rules.
- Boot
- Money or non-like-kind property received that may create taxable gain.
- NNN lease
- A lease generally assigning property taxes, insurance, and maintenance expenses to the tenant.
- Like-kind property
- Qualifying real estate exchanged for other real estate of a similar nature or character.
What should investors check before a 1031 exchange NNN property purchase?
A NNN lease can reduce certain management responsibilities, but the lease must be examined carefully. As a CCIM with over 40 years of commercial real estate experience, I recommend evaluating investment quality alongside potential tax benefits.
For a single tenant NNN 1031 exchange, I recommend reviewing:
- Tenant credit
- Lease guarantees
- Rent increases
- Remaining lease term
- Roof obligations
- Financing contingencies
When comparing 1031 exchange triple net properties, investors should consider whether a retail NNN property, office building, or other qualifying asset fits their investment goals. A like property exchange does not eliminate the need to evaluate tenant stability, property condition, or future resale potential.
An NNN replacement property 1031 exchange must satisfy IRS requirements, but eligibility alone does not establish financial suitability.
Compare opportunities among NNN real estate for sale and review our guide to evaluating an NNN leased property. Explore our NNN investment information before selecting a replacement property.
Key takeaways
- Qualifying investment real estate can be exchanged for NNN property.
- 1031 exchange requirements include qualifying property use, proper identification, and compliance with IRS deadlines.
- A qualified intermediary and timely identification are important to a deferred exchange.
- Tenant quality and lease obligations still require due diligence.
A successful NNN investment property 1031 exchange should satisfy tax requirements without compromising investment fundamentals.
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