Leasehold as Relinquished or Replacement Property in a 1031 Exchange

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In the spirit of tax time this is a topic I cover annually. To get started, leasehold interests can be either the down-leg or the up-leg (relinquished or replacement property) in an exchange.  Leaseholds with remaining terms of 30 years or more are considered ‘like kind’ to a fee simple interest in any real estate held for investment or productive use.

Additionally, leaseholds with a shorter initial fixed term with options extending to 30 years or more can be considered ‘like kind’.

With the recent tax reform, like kind real estate exchanges are more important than ever since personal property exchanges were written out of the new tax bill.

Gross versus Net, NNN, Triple Net leaseholds

As is the case with fee simple interests, leaseholds can also be a ‘gross’ or ‘net lease’, NNN, ‘triple net’ meaning that expense are mostly paid by the landlord in a gross lease and that includes property taxes. In a ‘net lease’ the tenant pays all or almost all expenses including property taxes.   As always, the devil is in the details, so make sure to thoroughly read the lease and have your real estate attorney review the lease.

Triple Net, NNN, Net Lease Advantages

The advantages are much the same as it would be with a fee simple interest with the most significant being far fewer management headaches. Triple nets and what we call, absolute net opportunities make it far easier for an out of area owner to manage.  The second greatest advantage is predictable cash flow with increases built in to the lease.

Whether it is a triple net leased property in Santa Monica / Los Angeles area or net Lease in Columbus, Ohio or anywhere in between, if I can assist you , please contact me, Scott Harris at 310-473-4789 or 614-905-6614