A ground lease is a type of real estate lease in which the tenant (lessee) has the right to use and occupy the property for a specified period of time, but does not own the underlying land. In a 1031 exchange, a ground lease can be considered a “like-kind” property and used as the replacement property in a tax-deferred exchange.
Key-Takeaway
- Ground leases can be used as replacement properties in 1031 exchanges.
- The terms of the ground lease, such as the remaining lease term and rent payments, should be considered when evaluating the suitability of the lease as a replacement property.
Example
Suppose an investor owns a commercial property that is subject to a ground lease with a remaining term of 20 years. The investor can exchange this property for another ground lease property with a similar term, thus deferring the payment of capital gains tax on the sale of the original property.
Tips
- Carefully review the terms of the ground lease, including the rent payments, length of the lease, and renewal options.
- Consider the creditworthiness of the ground lessor, as this can affect the stability of the lease.
- Take into account the potential for rent increases and the impact on the income generated by the ground lease.
Recommendations
- Work with a qualified intermediary or other professional to assist in the 1031 exchange process.
- Consider alternative investment strategies if the ground lease may not be the best option for your situation.
- Carefully evaluate the risks and rewards of a 1031 exchange involving a ground lease, taking into account the terms of the lease and the potential impact on the investment.