A 1031 Exchange is greatly valued in the commercial real estate industry as an investment strategy that can be used for buying better property which can gain much higher returns while deferring tax payments. In the example below, Michael owned an apartment complex for many years but it was management intensive and was generating a very low return on his equity. Michael reached out to me to see what he can do with his property as he was getting older and did not want the stress of keeping up with the tenants. At the same time, the property needed significant improvements that would only further reduce his future income. After careful consideration, Michael decided a 1031 Exchange would be the best strategy as he could sell his property, defer taxes and buy a new property that better suited his needs. See below for details:
Before 1031 Exchange: Apartment
Rents far below market
Significant differed maintenance
Long term owner = no more depreciation write off
Significant management responsibility
Potential for rent control restricting ability to increase rents and evict problem tenants
Unpredictable cash flows – potential for major maintenance expenses, i.e. roof, plumbing, electrical, kitchens/baths, etc…
Extremely low 1.5% cash on cash return – $27,000 annually
After 1031 Exchange: Single Tenant Rental - NNN
Brand new construction
New 15 year corporate guaranteed lease
Zero management responsibilities
NO expenses, tenant pays taxes, insurance and maintenance
Consistent cash flow - no unexpected expenses make it easier to budget
Consistent rent increases of 10% during every option period
Great demographics
6.25% cash on cash return - $181,000 annually