What is a Ground Lease 1031 Exchange?

What is a Ground Lease 1031 Exchange?

What is a Ground Lease 1031 Exchange?

By: Shannon Kinnard

A critical requirement in a 1031 exchange is that the property being sold and the property being acquired must be considered “like-kind” to each other. Properties are like-kind for 1031 exchange purposes if they are of the same nature, even if they differ in grade or quality, and if they are used for business, trade or investment. The standard form of ownership in most real estate transactions and 1031 exchanges is fee simple interest. Fee simple interest refers to the complete ownership of land and any buildings on it. One alternative form of ownership that may qualify for a 1031 exchange is a ground lease / leasehold interest. A ground lease / leasehold interest grants a temporary right to occupy land or property. Under IRS regulations, leasehold interests are considered like-kind to fee simple real estate provided the leasehold has a remaining term of 30 years or longer.

This specialized type of 1031 exchange can be advantageous for investors seeking to adjust their approach to real estate investment. Unlike a traditional exchange where an investor directly acquires a replacement property, this method allows for the acquisition of a long-term leasehold interest. Many investors will also combine a ground lease exchange structure with a construction (or build-to-suit) exchange structure to use the exchange funds for improvements to the property.

Some potential advantages of acquiring a long-term leasehold interest:

  • Portfolio Diversification: Long-term leasehold interests offer investors a way to diversify and enhance their portfolio by allowing them to secure preferred locations that may not be available for fee simple purchase.
  • Cost Effectiveness: Long-term leasehold interests may be more cost-effective than purchasing fee simple ownership of a property.
  • Tax Deferral: Long-term leasehold interests that qualify for a 1031 exchange allow investors to defer capital gains taxes and retain more capital for reinvestment. For investors interested in long-term leasehold interests, this also allows for more replacement property options than investors who are only looking for fee simple purchases.

The 1031 exchange process can be complex, but strategic planning with your tax advisor and our team of experts at Genesis Bank Exchange can help maximize the potential of your investments. If you’re interested in learning more about the 1031 exchange process and how it may benefit you, connect with the Genesis Bank Exchange team by calling 800.797.1031, or explore further details on our website: https://www.mygenesisbank.com/1031Exchange.

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