Boot is any non like-kind property received by the exchanger and is taxable to the extent there is capital gain. “Cash boot” is the receipt of exchange proceeds by the exchanger.
“Mortgage boot”, also sometimes referred to as “debt relief,” is the exchanger having less debt on the replacement property or properties than they had on their relinquished property. Cash or mortgage boot can be offset by the exchanger adding outside cash to the replacement property purchase. If the exchanger wants to receive cash boot, it must be received either at the closing of the relinquished property or after they have purchased all property they are entitled to under the exchange agreement- which is generally the end of the exchange period.
The exchange ends the moment the taxpayer has actual or constructive receipt of the proceeds from the sale of the relinquished property. The use of a QI is a safe harbor established by the Treasury Regulations.
If the taxpayer meets the requirements, the IRS will not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent.
A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI, acting under a written agreement with the taxpayer, acquires the relinquished property and transfers it to the buyer.
The QI then holds the sales proceeds, to prevent the taxpayer from having actual or constructive receipt of the funds. The QI then acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits.
A reverse exchange is closing on the purchase of the replacement property before closing on the sale of the relinquished property. Many investors utilize a reverse exchange to immediately acquire a desirable replacement property where there may be competing offers or there is a pressing need to close quickly.
Other investors may initially set out to perform a delayed exchange, but quickly find an ideal replacement property they must close on quickly. In this second scenario, the exchanger avoids the pressure associated with the 45-day identification rule.
Exchange Period – The period within which the person who has sold the relinquished property must receive the replacement property is referred to as the “Exchange Period” under Section 1031 of the IRC. The “Exchange Period” ends at the EARLIER of 180 days after the date on which the person transfers the relinquished property or the due date for the person’s tax return for the taxable year in which the transfer of the relinquished property occurred.
Although an exchanger can identify more than one replacement property, the maximum number of properties that can be identified is limited to one of the following three rules: 1) Three replacement properties without regard to their fair market value (the “3 Property Rule”) 2) The value does not exceed 200% of the aggregate fair value of all relinquished properties (the “200 Rule”) and 3) Any number of replacement properties without regard to the combined fair market value, as long as the properties acquired amount to at least 95% of the fair market value of all identified properties (the “95% Rule”).
45 Day Identification Period – From the time of closing on the relinquished property, the investor has 45 days to nominate potential replacement properties. The investor normally nominates three potential properties of any value, and then acquires one or more of the three within 180 days.
Typically, a common address or an unambiguous description will suffice. If the investor needs to identify more than three properties, it is advisable to consult with your 1031 facilitator.
A delayed exchange happens when the exchanger closes on the sale of their relinquished property on one date, and then acquires a replacement property from a seller at a later date.
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.
Internal Revenue Code Section 1031 exchanges allow investors to sell property and reinvest the proceeds in another property without having to pay taxes that would otherwise be owed on a recognized gain from sale. The payment of such capital gains tax is deferred, representing only a potential tax which is not owed unless and until the replacement property is sold in a subsequent taxable transaction. The taxes may, in some cases, be avoided all together, for example if the replacement property passes through an estate and its basis is stepped up to the market value at the time of death.
1031 tax deferred exchanges allow real estate investors to defer capital gain taxes on the sale of a property held for productive use in trade or business or for investment. This tax savings provides many benefits including the preservation of equity.
Investors can take advantage of exchanges to meet other objectives including: A) Leverage: exchanging from a high equity position or “free and clear” property into a much larger property with some financing in order to increase the return on investment. B) Diversification: such as exchanging into other geographical regions or diversifying by property type such as exchanging from several residential units into a retail strip center. C) Management Relief: for example, exchanging out of an apartment complex and into a single tenant NNN property with no management responsibilities.
Most Estoppel forms are pre-agreed to and shown as an exhibit to the lease and that the tenant is not willing to make further changes. This is especially true with large national chains. Upon the buyer’s removal of all contingencies to the purchase contract, the buyer must submit the exact entity name and address, as they want it to appear on the Estoppel to the tenant (through the seller).
Once submitted, this cannot be undone or edited without starting the entire Estoppel approval process over.
Wheeler lease section
Most SNDA forms are pre-agreed to and shown as an exhibit to the lease and the tenant is not willing to make further changes. This is especially true with large national chains. Upon the buyer’s removal of all contingencies to the purchase contract, the borrower and lender must submit the exact entity name and address, as it is to appear on the SNDA to the tenant (through the seller).
Once submitted, this cannot be undone or edited without starting the entire SNDA approval process over.
Wheeler lease section
Borrowers should submit a loan application and pay for all 3rd party reports, including an appraisal, an environmental study, and a survey (as required by the lender) within 10 days of the Purchase Agreement execution. When this is done, rarely is there a need for more time. Lenders and mortgage brokers will often delay this process and rely on the seller to provide an extension of the financing period if these items are finished past the deadline. Experienced sellers of net leased investment property will not consider an extension, unless the buyer can show evidence that they have done everything in their power to meet the financing contingency and closing deadlines.
If the real estate being sold is in high demand, a seller may still decide not to give an extension.
To arrange site inspections contact the listing agent providing at least 3 business days’ notice from the date you want to visit the property, but providing 1 weeks’ notice is preferred. Do not contact to the tenant directly.
This is a negotiable term and is addressed in the Letter of Intent. For net leased real estate transactions this is, typically, 21-45 days from the date the Purchase Agreement is executed.
A short financing period is often the deciding factor in the seller choosing between multiple offers where financing is required.
Most sellers will want the buyer to commit to at least 35% down or a 65% Loan to Value (LTV) ratio. Lenders will often commit to a higher LTV but anything above 70% has a much lower probability of funding. A lower Loan to Value ratio (less than 50% LTV) is often the deciding factor in the seller choosing between multiple offers where financing is required.
Borrowers should submit a loan application and pay for all 3rd party reports, to include an appraisal, an environmental study, and a survey (as required by the lender) within 10 days of the Purchase Agreement execution. Lenders and mortgage brokers will often delay this process and rely on the seller to provide an extension to the financing contingency if these items are finished past the deadline. Experienced sellers of net leased investment property will not agree to this.
Your mortgage broker should have recent experience sourcing financing specifically for net lease investment property. The Loan Watch section of our website will allow you to browse the rate and terms of recently funded loans for net lease real estate and can be sorted by the tenant who occupied the property.
This is a negotiable term and is addressed in the Letter of Intent. However, each state has its own customs for closing costs responsibility.