Can A Net-Leased Property Solve Your IRC 1031 Exchange?
Some of the problems exchangors face include:
1. Not finding the ideal property within the 45 day identification period.
2. Wanting to use the proceeds to buy a personal residence or other property which does not qualify under IRC 1031.
3. Apprehension about being able to close on the property of first choice.
4. Desiring to place net worth in an exempt asset for bankruptcy purposes.
Rather than pay a substantial tax on the sale, the exchangor might wish to consider a net leased property as the replacement. A net leased property is generally a property leased to the United States Government or other strong credit tenant for a period ranging from 15 to 25 years. Many, if not all, of the expenses are paid by the tenant; therefore property management duties are usually minimal. The net leased property may be the ideal solution for an investor who wishes to travel or does not want active management responsibilities with an investment property. Additionally, net leased properties are generally considered to be a lower risk investment due to the long lease term and strong credit rating for the tenant.
For the person who wishes to use the proceeds to purchase a first or second home or invest in the stock market or other asset not qualifying as replacement property under IRC 1031, the net leased property can serve a valuable purpose. If a person purchases a net leased property with a financially strong tenant, they usually can place a long term, low interest mortgage on the property shortly after closing. The amount of the mortgage can be as much as 75% up to 100% of the value of the property. Borrowing money against the property after the exchange is not a taxable event. The mortgage payment is usually covered by the rent and the loan proceeds can be used for any purpose.
If the person cannot find the ideal property within the 45 day identification period, they can purchase the net leased property and refinance to purchase the desired property when it becomes available,perhaps several years later.
For the person exposed to litigation resulting from their business or profession, purchasing assets in an exempt category for bankruptcy purposes would enhance financial safety. Usually, litigation is initiated for the primary purpose of receiving monetary recovery. If the prospect of recovery is low. Then the motivation to invest time and money in the pursuit of litigation is also low for both the litigant and their contingency fee based attorney. If the net leased property were refinanced after purchase and the proceeds placed in an exempt asset, those assets would generally be in a protected status. A recent change in Texas law includes cash value life insurance and annuities as exempt assets. Any remaining equity in the property after refinancing would remain at risk but the motivation to go after the property would be low.
An additional safety measure is the investment in a Swiss annuity. The Swiss annuity has the added advantage of Swiss privacy and requires a set of formidable steps to levy a foreign judgment. The Swiss reputation for financial security would be at stake if it were not for the barriers against enforcement of foreign judgments. The JML Swiss Annuity's annual administrative fee of six tenths of one percent is one of the lowest in the industry.