This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

This article was originally part of our October, 1998 Newsletter.

Many clients thinking about selling discard the like-kind exchange option because they are tired of being landlords. They have had too many worries about drain problems, evictions, damage, rent control....

In a §1031 exchange for real estate, any (US) real estate qualifies, even if the owner is not actively involved in the management or operation of the property. A good example is a triple net lease.

Tom wanted to sell and cash out, even if it meant he would pay tax. He was TIRED of the headaches of being a landlord. His profit on the sale would be $400,000. If he had to pay tax, he would owe over $100,000. He could invest the balance in bonds and get income of $16,000 each year, guaranteed, with no headaches.

Instead he did a §1031 exchange and bought a property upon which a national chain built a hamburger outlet. Although it is owned by a local operator, the national chain guaranteed the lease terms.

The tenant pays all expenses, including repairs, insurance, and property taxes. Tom gets a check every month, automatically deposited into his account.

If the guy who flips the burgers calls in sick, Tom does not even know about it. If the local operator goes broke, the national chain will pay the monthly rent to Tom.

With no headaches, and no taxes to pay on the sale of the old property, Tom has a much bigger income than if he had sold and paid tax. Unlike other options to postpone tax (installment sale, Charitable Trust, etc.), Tom's heirs will receive a step-up in basis allowing them to sell the property tax free at Tom's death.

Using a triple net leased property acquired in a §1031 exchange makes life much simpler, and hopefully more profitable, for people who want to get rid of the problems of owning real estate, yet postpone the taxation. This works extremely well for senior citizens who have owned one or more investment properties for years, with large built in profits.