How to 1031 Exchange Into a NNN Property: A Step-by-Step Timeline

Phase 1: before you list the property you are selling

The exchange is won or lost here. Run the tax estimate so you know what the exchange is worth and what the replacement must cost to defer all of it. Decide what you want the equity to do for the next decade: a long-term lease to a credit tenant for passive income, a shorter lease with upside, a ground lease, or several smaller properties. Set the price range and debt plan with your lender, since a NNN purchase financed at today's rates may need more equity than the sale produces.

Then begin the replacement search in earnest. Ask your broker for current and off-market NNN candidates in your range nationally and in the Southwest, and underwrite the top five as if you were buying tomorrow. The goal is to close your sale with two properties you could identify the same day. Our NNN guide covers what to underwrite; the sequence below assumes you have read it.

1. Run the 1031 tax estimator; confirm the replacement price floor and the equity and debt to replace.
2. Engage a qualified intermediary now, not at closing; confirm its fees, bonding, and segregated accounts.
3. Engage your CPA and attorney on the exchange structure, entity, and state tax questions.
4. Begin the NNN search with a written buy box: tenant credit floor, minimum remaining term, lease structure, geography, price range, and target cap rate.
5. List the relinquished property with the exchange disclosed in the contract and a closing date you control.

Phase 2: your sale is under contract

Have the purchase agreement acknowledge the exchange and your right to assign it to the intermediary, and send the closing instructions to the title company so the proceeds wire to the QI's segregated account. Review the settlement statement with the QI and CPA before closing: prorations, loan payoffs, and costs paid from exchange funds can create boot.

In the same weeks, move your primary NNN candidate from underwriting to a letter of intent. Sellers of quality net-leased property receive multiple offers; a buyer who can show a sale under contract, a lender's term sheet, and an intermediary already engaged wins ties. If the primary candidate is a multi-tenant or value-add property, run the same process; the point is to be in negotiation on day 1, not day 30.

Phase 3: day 1 to day 45, identification

The clock starts the day title to the relinquished property transfers. Deliver written identification to the intermediary by midnight on day 45, describing each property unambiguously by address or legal description. Most NNN buyers use the three-property rule: the primary target, ideally already under contract, and two backups. A DST interest can serve as a backup when proceeds are small or a backup building cannot be found. The 200 percent and 95 percent rules exist for larger portfolios; use them deliberately.

Before you identify, complete the underwriting that determines whether a NNN property is what it appears to be.

• Tenant credit: audited financials or a public rating for corporate leases; for franchisees, the operator's unit count, guaranty, and store-level sales where obtainable.
• Lease: remaining primary term, renewal options and their rent, rent bumps, who carries roof, structure, parking lot, and HVAC replacement, assignment rights, co-tenancy and go-dark clauses, and early termination rights.
• Real estate: a location that would re-lease if the tenant left, with visibility, access, traffic, and a use that fits the building; a dark-store exit plan is part of NNN underwriting, not an afterthought.
• Financing: a lender's term sheet showing the loan sizes to the lease term and tenant credit, and a debt service coverage ratio that survives the rent schedule.
• Price: the cap rate in context of comparable closed sales for the same tenant and lease term, not a national average.

Phase 4: day 45 to day 180, closing the replacement

Assign the replacement purchase agreement to the intermediary and complete due diligence with time to spare: estoppel certificate from the tenant confirming the lease terms and that no defaults exist, a subordination and non-disturbance agreement if there is a loan, title and survey, Phase I environmental, a property condition report focused on roof and structure where the lease leaves them with the landlord, and the tenant's insurance certificates. For a ground lease or a property with percentage rent, add the tenant's sales reporting history.

Schedule closing at least two weeks before day 180 and before the due date of your tax return if that comes first, or file the extension. The intermediary wires the exchange funds to the closing, you take title, and the exchange is complete. Keep the closing statement and the intermediary's exchange documents with your return.

Phase 5: after closing

Report the exchange on Form 8824 with the return for the year of the sale. Set calendar reminders for rent escalations, option notice dates, and lease expiration, and for the first time the lease lets you audit the tenant's compliance with maintenance obligations. Revisit the property annually against the market: a NNN asset with a shrinking lease term is worth less each year, and the right time to sell or exchange again is usually with seven or more years of term remaining, not two.

If the property sits in another state, confirm the nonresident filing obligations with your CPA. New Mexico taxes gain as ordinary income when it is eventually recognized, and the basis you carried over follows the property through every subsequent exchange until it is sold for cash or stepped up at death.

Worked example: from an Albuquerque industrial building to a NNN pharmacy

An investor sells a 30,000-square-foot Albuquerque industrial building for $3.9 million with a $1.2 million loan and $600,000 of accumulated depreciation. The tax estimate shows roughly $700,000 of combined federal and New Mexico tax on a taxable sale, so the exchange is worth planning. Ninety days before listing, the investor engages a QI and begins underwriting net-leased candidates with investment-grade tenants and 10 or more years of term in the $3.9 million to $4.5 million range.

By the time the sale closes, a drugstore on a corporate lease with 12 years remaining is under letter of intent at $4.2 million. The investor identifies it, a second pharmacy in Arizona, and a DST interest as backups on day 20. Due diligence surfaces a roof repair obligation the lease leaves with the landlord; the price is adjusted by the cost of a new roof. The purchase closes on day 110 with the intermediary's funds and a new $1.3 million loan, replacing the debt. The investor's equity, including the deferred tax, is now earning a net lease rent with no management, and the next exchange can be planned for year seven.