Hi all, 

I'm new to this excellent site (and have no expertise in RE investment). Thank you in advance for any help and advice!

My situation is this: I'm recently retired, and it's time to sell a building I own. There will be significant capital gains, and I would like to defer, by some sort of 1031 arrangement, the payment of tax on the capital gain. (The gain would be somewhere upwards of a million dollars.) 

I've heard that triple-net leases are a way to do this without actually having to buy a new property on my own. My understanding is that I can invest through an agent, and get a safe, trouble-free income stream (with the understanding that this would be taxed as ordinary income).

I'm afraid of making a ghastly mistake here. My questions are:

1) Is this a reasonable idea for someone in my position? 

Thanks again - I feel very fortunate to have found this forum.

I did have a second question, but it was removed by the moderators! I expect it was not in line with the terms of the forum.

That's fine; the first question is the most important one anyway.

@Malcolm Pollack , What you're describing is a very common and natural transition that the 1031 exchange is perfect for. You're wanting to move into a more passive and secure position in conjunction with retirement. We deal with hundreds of investors doing just that every year now. That's what the 1031 is designed to do. And you've got quite a few options out there to do just that.

The key is that when you do a 1031 you are selling investment real estate and you need to purchase investment real estate. But purchasing at least as much as you sell and using all of the net proceeds in the purchase you will indefinitely defer all tax and depreciation recapture.

And as part of your succession and estate planning it's important to note that as long as you own the replacement property you will pay no tax. And as long as any time you sell the replacement property you do another 1031 you will pay no tax. And when you die your property will go to your heirs at what is called a step up in basis. In other words the tax disappears and they inherit the property tax free. It's a great way to pass on generational wealth. But the process in order to achieve that (death) isn't so good. So just keep half a mind to that and focus on the immediate benefit :)

Some of the more common options that investors looking toward retirement will lean towards are:

1. NNN properties with national credit tenants. The tenant corporation (Walgreens, Fresenius, etc) guarantees the lease and the tenant is responsible for all taxes insurance and maintenance. It's as hands off as it can get. The leases are typically longer and with the right tenant also as secure as it gets. You're not buying the lease. You're still buying the real estate. But the tenant will take care of all management upkeep. You just get the rent check.

2. DST or TIC properties. These in essence are just fractional ownership of a larger NNN in most cases. They are set up to accommodate investors who do not have the horsepower to purchase a NNN by themself. TICs are actually set up so you purchase a deeded interest in the actual real estate asset. So these easily qualify for 1031 treatment. DSTs (delaware statutory trusts) were blessed by the IRS in 2004 (rev proc 2004 - 86.). You're actually purchasing a membership in the trust but because the IRS says its ok - it's OK with 1031.

3. Vacation properties or future retirement houses.  With some patience it's possible to 1031 into properties that you end up living in and vacationing in while continuing to defer all of the tax and depreciation recapture from the past gain.

When you start to move into this type of investing it's as important or in many cases more important to concentrate your due diligence on the tenant and lease.  Being nervous will keep you on your toes.  But take heart you're following a well trod path. The key is surrounding yourself with the right team.

Let me know if you think of that second question.  The Bigger Pockets gremlins have gotten all of us at one point or another ;)

Thank you for this!

As for my other question, well  --  I'll try to put it in such a way as not to violate any forum guidelines  --  it was what criteria I should use to find a reputable agent to get me into a triple-net-lease investment without being scammed or otherwise taken advantage of. 

But I do have other questions as well: What "cap-rates" can I expect? How liquid are these investments? How does getting into a triple-net investment (which I am thinking of, basically, as being an annuity) differ from buying property in the usual way?

I do appreciate your help.

@Malcolm Pollack NNN properties are generally handled by licensed real estate professionals. The fractional types of investments can many times be sold by either securities dealers or realtors depending on type. Anyone with the right securities license can sell DSTs. Because the foundation of all such investments is real estate and not just securities or corporate structure I believe it's important to work with representatives brokers or realtors who are strongly versed in real estate analysis as well as able to vet corporate strength and lease quality.

The market for these is much more efficient than regular residential real estate so cap rates tend to revolve around a central cluster at any point in a market with  outliers being a function of risk and quality .  There are cash in the bank opportunities that have cap rates below 5.  There are still opportunities to be had where the cap rates advertised approach double digits.  And there are a lot of cap rates being advertised as one amount but the truth is probably quite different.  the actual profile of  property, tenant and lease on these will be staggeringly different

I would check out blogs, youtube videos. I would first see what do you want to invest in Commercial or Residential. Then once you make that decision see do you want to own a multifamily complex, self-storage, student housing or so forth. If commercial and as you stated you are new, look for NNN leases (no landlord responsibility, just collect check). As also new maybe something close to where you live so easy to check on. NNN lease with national companies usually translates to safer investments (everything has risk) but low returns. Check out Crexi or loopnet websites or speak to your local Marcus Millichap, CBRE or JLL broker. Just remember if doing a 1031 you need to find an intermediary and speak to someone who is a qualified 1031 so can make best and informed decision. Good luck!!

Thank you both very much --  this is all very helpful!

To all of the experts on this platforms: What is your recommendation when it comes to RE investing specifically in California for a novice? Are there certain pockets of areas, asset classes that are more suitable for someone who is starting out in this game?

@Malcolm Pollack I have been on a few podcasts recently on how to invest out of state successfully and build a team. I would be happy to send you the links and see if it might be helpful. I would say, we are seeing great yield on NNN properties in the midwest that are 7.5+ CAP rates.