Sale Leaseback 1031 Exchange

What is a Sale Leaseback 1031 Exchange and how can it help my business? If you are a business owner that owns the building housing your operations, a Sale Leaseback 1031 Exchange could enable you to unlock trapped equity and diversify your income by reinvesting in commercial property.

A Sale Leaseback is when the owner of a property sells the property and then leases it back from the new owner. Business owners often do this to unlock “trapped” equity in their mortgages due to amortization, or to realize the gain in appreciation of property values. By doing this, business owners are able to realize this equity and use it to expand their business operations. The beauty of a sale-leaseback transaction is that the business owner doesn’t have to move their operations, and the new lease payments are tax deductible expenses in the year that they are paid. Often times sale-leasebacks are structured so that the seller has the right to buy back the property at the end of the lease.

If a business owner sells their property in a sale-leaseback, they must first use the proceeds to pay off any existing loan on the property, and then they will have excess proceeds to use to expand their operations or invest on other opportunities. In the case of a Sale-Leaseback 1031 Exchange, the investment property owner will sell their business property and use the sales proceeds to purchase another replacement property, while taking into consideration all the necessary precautions and regulations of a 1031 Tax Exchange. This will enable the business owner to maintain leasing the space that occupies their business while unlocking their accrued equity and diversifying their income by reinvesting it in another piece of commercial real estate. The business owner will now pay rent on their space instead of a mortgage payment, but will now receive rental income from their newly acquired investment property.

There are several advantages of purchasing a building under a sale-leaseback. The first of which is that you are buying a property with a tenant already in it that wants to stay for a ling period of time. These tenants are usually fairly good credit tenants if they feel comfortable participating in a sale-leaseback. This means that they have a fairly stable cash flow if they are willing to take cash out of a mortgage that they have been paying down for several years.

When a sale-leaseback is structured so that the seller has the option to repurchase the property at the end of the lease it is called a sale-lease-buyback. The repurchase at the end of the lease needs to be at the fair market value of the property at the time of the repurchase. If it is not, the IRS will deem the transaction as a long term installment sale and any income tax benefits that might have been enjoyed during the transaction will be disallowed by the IRS.