From an economic standpoint, agricultural or undeveloped land produces a small amount of cash flow, if any, as a percentage of the fair market value of the property.
Rental property produces more income, but along with this cash comes toilets, trash, tax, tenants and trouble.
In a 1031 exchange under the Internal Revenue Code, a taxpayer who has held real property for productive use in a trade or business or for investment can exchange that real property for any other “like-kind” real property. Exchanges have been a part of the tax code since 1921 and represent one or the most effective strategies available to landowners to defer capital gain taxes.
A misconception concerns the types of property that qualify as “like-kind.” Some mistakenly believe they must exchange apartments for apartments. Not true. The definition of like-kind property is very broad; qualifying replacement real property can be virtually any real property that will be held by the taxpayer for investment purposes or used in a trade or business. Office buildings, retail centers, apartment buildings and other rentals can be exchanged for less management-intensive properties.
Greg Lehrmann, Founding Member, Excel 1031 Exchange.
Choosing the Right Investment
One of the most popular ways to use 1031 exchanges is to turn high-maintenance real estate into “mailbox money” (although nothing is completely management- free) by purchasing one or more of these:
1. NNN Properties
A triple-net-lease property is real estate that is leased to a tenant who is responsible for the ongoing expenses of the property, including real estate taxes, building insurance and maintenance, in addition to paying the rent and utilities.
2. Delaware Statutory Trusts
An ownership interest in a Delaware Statutory Trust (DSD is an indirect way of owning investment real estate. This can be appealing to taxpayers who are interested in acquiring a managed real estate investment. The trustee of the DST initially purchases the property and holds title to the property. A sponsor structures the investment and arranges for the issuance of beneficial interests in the DST. Although interests in the DST are treated as securities under federal securities laws, they are treated as ownership of real estate and thus like-kind pursuant to §1031.
3. Royalties
Mineral rights and royalties have been handed down through generations. Families have been receiving royalties from oil and gas for over 100 years. Until recently, they were only resold to institutions, large endowment funds, and ultra-high net families. Increasingly, ranch sellers are able to purchase producing royalties with investments as little as $100,000 (just as DSTs) and then experience the cash flow generated by such royalties.
Takeaway
Many property owners are extremely surprised and happy to learn about the opportunity to move from low-performing land or high-maintenance buildings to passive, income-producing properties in a tax-deferred manner. We invite you to contact us for more information.
About Us
Greg Lehrmann is the founding member of Excel 1031 Exchange with 42 years of experience in commercial and residential real estate law. For the past three decades he has dedicated his career to 1031 exchange work and has handled tens of thousands of exchanges throughout the country.
Lehrmann is a distinguished attorney double board certified in commercial and residential real estate law by the Texas Board of Legal Specialization. Only 2% of attorneys in Texas meet this exacting standard. He has a B.BA with honors in accounting from The University of Texas and a J.D. from The University of Texas School of Law.
Lehrmann and his wife, Texas Supreme Court Senior Justice Debra Lehrmann, have two sons, Gregory and Jonathan, practicing attorneys, and three beautiful grandchildren.
