1031 Exit Strategies

[Eddie Pfeifer]

My wife and I have a NNN property in rural MS which is going great. The lease is guaranteed by the parent company, so even if store goes dark, we get paid as long as the company is solvent.

We live abroad and are considering moving back to the States to take a more hands-on approach into something that doesn't have a ticking time bomb (our NNN lease ends in 2030, after which there are multiple 5-year options the corporation could or couldn't exercise).

My wife wants to know if there are any other options to exit a 1031 exchange without getting gouged on capital gains (on already exchanged property).  We've discussed deferred sales trusts but the pay-out isn't great and you're still on the hook for some of the capital gains (or at least that is my understanding).  

Thanks in advance for your replies.

[Dave Foster]

@Eddie Pfeifer, One option that might just work for you would still be to continue the 1031 and thus continue the tax deferment.  But make the replacement property something that could be positioned as your primary residence when you do move back. 

The 1031 requires that you sell investment property and buy investment property.  But the type does not matter.  And you do not have to maintain the property as investment forever.  You can convert an investment property to your primary residence and not trigger the tax.  There is even a two year safe harbor from the IRS.  

That positioning might allow you to then take cash outside your exchange that you would have normally used for housing and use it instead for active investment. And even better, after you've owned that converted property for at least 5 years and have used it as your primary residence for at least 2 years you can then sell and actually still take a portion of the profit tax free allocated between your primary use and the investment use.  

Not a bad plan to consider and see if it lines up with your movement desires.