By using an IRC Section 1031 Exchange with the sale of appreciated land, you are able to defer capital gain taxes.
Exchanging land into commercial real estate offers several benefits, including:
• Higher income potential—Commercial properties generally provide higher cash flow returns than land or rental houses.
• Triple net leases—Another reason for investing in commercial property is that many properties offer triple net leases. This is a type of lease where you, as the property owner, do not have to pay expenses on the property (as would be the case with residential real estate). The lessee (tenant) in a triple net lease is responsible for all property-related expenses.
• Long leases—Commercial leases offer leases for multiple years. Some commercial properties offer leases up to 15 or 20 years. Longer leases offer cash flow stability.
• Interests of landlord and tenant are better aligned—Tenants of commercial properties usually have a vested interest in maintaining the appearance of the building because it affects their business. Keeping the property in good shape may help to increase the investment value for the property owner over time.
Evaluating investments
Here are four common methods for evaluating commercial real estate investments:
• Price per square foot—This is determined by dividing the cost of the property by the square footage of the property. Knowing the price per square foot is an easy way to compare the pricing of other properties to each other.
• Gross multiplier—This method divides the gross operating income of the property by the cost of the property.
• Capitalization rate (cap rate)—Cap rate is the most widely used method for valuing income-producing real estate. You determine the cap rate of a property by dividing the net operating income (rental income minus expenses of the property) by the cost of the property.
• Cash on cash—The cash on cash return of a property is simply valued by dividing the cash flow before taxes of the property by the cash invested.
If you are selling or considering selling highly appreciated land and you wish to generate income for retirement, using a 1031 exchange and investing in commercial real estate may help you to preserve equity and generate more income. — Chris Nolt
(Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. For more information, visit solidrockproperty.com and solidrockwealth.com, or call Chris at 800-517-1031.)
