Exchange - Rental Property to Commercial Property ?

Question

Hi all,

I have a duplex in Orange County, CA that I have held for 25 years and I want to consider an exit strategy. I have deducted 25 years of depreciation which would need to be recaptured on normal sale ( ouch ). So, I thought I heard of the possibility of exchanging into a commercial property and leasing it out for 5-10 years ( to a WalGreens / CVS pharmacy ) and then live off the income stream and avoid capital gains taxes.

So, is this possible ? Where would you begin to look for the commerical property ?

Thanks, Paul

Richard Chang · Answer

Hi all and thanks for all the good replies.

As Joel said, I basically "don't have a clue" and will have to "get educated".

I think the main things for me are

• to minimize property mgmt headaches
• get a good return
• avoid capital gain taxes.

So, I will have to educate myself on NNN, TIC , DST etc and determine if this is the way to go for me as I am approaching retirement in a few years.

Thanks, Richard

Curtis Bidwell · Answer

@Richard Chang As both are considered investment there should be no problem doing a 1031. We took several SFR and did a 1031into a mixed use building that had apartments, restaurant, office and retail services. Good luck to you!

Joel Owens · Answer

Richard how much proceeds will you have to exchange with??

Pharmacies have zero rent increases in the primary term of the lease.

You can get into some pharmacies with 10% down.

Lenders look at your liquidity and net worth even with a pharmacy.

How much cash on cash are you expecting annually??

Pharmacies vary in price from 2 million to 20 million depending on location. Some with just a few years left on the primary term of the lease might trade lower in price or in a rural area.

"I heard of the possibility of exchanging into a commercial property"

People hear lots of things but until they talk to investor/commercial brokers who are active in the markets daily they do not know what the realities are. The buyer just has an IDEA at that point.

That is why it is critical to talk to someone on the phone as commercial might not even be the right path for you. There is a discovery process you need to go through to see if your idea matches up with reality.

Bill Exeter · Answer

Hi Richard,

I had a follow-up thought as well. You might want to compare net lease properties with other types of "passive" investment property opportunities as well. These could include investments such as:

• Net Lease Properties (NNN)
• Tenant-In-Common Investment Properties (TICs)
• Delaware Statutory Trusts (DSTs)

These asset classes all market to the 1031 Exchange clientele who are looking to get out of property management headaches but do not want to get hit (killed) with taxes. You can defer the payment of your taxes by exchanging into these passive activity investment properties.

Bill Exeter · Answer

Hi Richard,

Yes, net lease properties such as a CVS Pharmacy, Walgreens, etc., are investment properties and will qualify for 1031 Exchange treatment. You can sell your duplex and 1031 Exchange into any type of real estate as long as it is held for rental or investment purposes. Net lease properties are very common replacement property solutions for 1031 Exchange transactions.

Richard Chang · Answer

@kevinhurney

Thanks for the quick reply. I'm not sure where the new property would be yet so I'm not sure which LoopNet agent to talk to.

Also, would appreciate any feedback on whether a 1031 Exchange would allow moving from an Investment Property to a Commercial Property.

Thanks, Richard

Kevin Hurney · Answer

loopnet.com contact the top agents in your area and tell them exactly what you're looking for

Exchange - Rental Property to Commercial Property ?

Exchange - Rental Property to Commercial Property ?

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