How to Use a 1031 Exchange: AZ Investment Property


Too many commercial real estate investors are unable to generate a strong, consistent cash flow. Instead, they take big risks with little rewards, struggling to optimize their business or investment property.

Don’t let your first property of merit become a wasted opportunity.

At NNN Deal Finder, we utilize a massive network of Arizona real estate investors, brokers, and commercial developers to help investors find the most reputable commercial investment properties with the best opportunities for strong, predictable profits.

Whether you’re seeking a pharmacy’s new property, a medical office building, a Phoenix restaurant, or other triple-net (NNN) real property of repute, our Arizona 1031 exchange specialists can help with your transaction.

Using the 1013 Exchange for Business or Investment Property

So-called 1031 exchanges are employed by many of the top-tier investors in the industry. As a great way to defer paying taxes and reduce tax liability under the law, a 1031 exchange takes advantage of the current 2022 market. With rising market prices, a successful 1031 exchange may lead to the transactions of sold properties for appreciating replacement properties.

Thus, an NNN investor may avoid various maintenance costs, insurance, or taxes on replacement properties. As long as the new property is paid for from the proceeds of the real estate, and the replacement property is of the same nature as the sold property, the 1031 exchange is typically permitted.

For instance, you could not relinquish a Phoenix convenience store for vacant land intended for a house.

The legal description for this similarity in nature is called like-kind property. This is just one of the rules required for a 1031 exchange to be permitted.

The following rules and regulations ensure that anyone investing through a 1031 exchange is following IRS law as it appears in writing.

Like Kind Replacement Property Value

Again, like-kind property refers to properties permitted under 1031 exchanges. As long as the properties are in the U.S. and used for business or investment purposes, they are likely permissible under 1031 exchanges.

An Arizona investor, however, cannot use his or her personal property for a 1031 exchange. A primary residence is strictly forbidden under the rules. If the replacement property has a lower value than the relinquished property, you are responsible for paying capital gains taxes on the profit difference.

The ability to defer capital gains taxes on one or more properties is just one of the benefits under the rules of 1031 exchanges.

Reasons to Use 1031 Exchanges

The benefits of the 1031 exchange are crucial for savvy and new Arizona investors alike. Once the owner has relinquished property for the new property, it becomes easier to build new opportunities for passive income.

This also makes it easier for portfolio diversification, as you can progress, essentially capital gains tax-free, for the time being.

The tax year benefits of using 1031 exchanges in Arizona are especially useful given how hot the current market can be.

The following benefits are noteworthy.

Deferring Capital Gains Taxes

Again, under 1031, every new property sale can be used beneficially toward every purchase. As a real estate investor proceeds with future purchases of higher-value real estate, he or she may not have to pay capital gains taxes for a while.

This is the main factor in wealth accumulation and the diversification of non-personal property. Under 1031, trading one commercial business for another more valuable business can prove lucrative. Every sale counts.

Estate Planning

If a realty owner or realty property owners sell real estate and then purchase more under a 1031 exchange, the taxes are deferred. However, if that individual suddenly dies, the property may go to an heir who doesn’t have to pay taxes. A qualified intermediary or exchange facilitator can help in this tax-free scenario.

Minimizing Risk and Labor

1031 exchanges are often used to take on other properties that are bigger, better, and more valuable. With NNN properties especially, investors do not have to cover traditional expenses such as common area maintenance, property taxes, and property insurance.

This means less risk and more reward.

Not to mention, investors can use 1031 to switch from properties that require extensive direct management to properties that may be managed by others or simply require far less toil and time.

Multiple 1031 Exchange Types

Under the law of Arizona’s 1031 exchanges, you can capitalize on various exchange types. These 1031 exchange rules should be followed closely and carefully.

Delayed 1031 Exchange

These allow investors to sell the property and then have 180 days to hire a qualified intermediary, secure the proceeds in a binding trust, and acquire a like-kind property. This is where exchange facilitators can assist.

Simultaneous 1031 Exchange

Both relinquished and replaced like-kind properties must close at the same sale time. Third parties, qualified intermediaries, exchange accommodators, and exchange facilitators can help.

Reverse 1031 Exchange

This like-kind exchange is the reverse of a standard exchange. You must first use all cash for a purchase and then sell his or her relinquished real estate property. The property qualifies if and only if this happens within 180 days.

Improvement 1031 Exchange

This applies the sale equity of the property people sell toward renovating the new property they purchase. After 180 days have passed, all the equity must be spent improving the property, the improved property must be finished and “substantially the same property,” and must have an equal or greater sale value.

Again, a qualified intermediary or exchange facilitator can assist. Don’t run afoul of the IRS rules and regulations. The IRS will not be very forgiving.

Best Areas for AZ Investment Property

Houses landscape

With its population growth exploding, the state of Arizona is a prime location for investors and property buyers alike. Due to its hot economy, great weather, attractive tourist destinations, and minimal unemployment, the state continues to draw people far and wide.

If you’re thinking of investing in Arizona, here are the best areas to consider:


With a population of roughly five million people, the metro area of Phoenix is home to numerous benefits for potential investors. The economy is booming and the job market continues to impress. Whether you invest in rental properties or anything else, the allure of Phoenix is enough to draw any savvy investor.

In fact, the median sales price in Phoenix has been steadily improving year over year. If you’re looking for an affordable, appreciating market, Phoenix is ideal.


This vibrant college location is filled with campuses, bars, restaurants, and all sorts of amenities. Whether you seek rental properties, commercial investments, or fix-and-flips, Tempe provides something for everyone.

Prices and values are expected to continue to increase in this attractive market.


Better known for its available single-family rentals, Tucson remains a stable real estate investment market. Although a relatively small area, Tucson boasts great educational standards and stunning properties, making it an ideal investment.

Not to mention, the downtown area is undergoing rapid expansion with affordable median home values, booming commercial growth, and diversified businesses.


Scottsdale is a big draw for anyone looking for strong employment numbers, attractive nightlife, and top-notch education systems. The market continues to be one of the hotter investment areas in Arizona.

With higher rents and continuing rental growth, Scottsdale is a smart investment for anyone looking to build a passive income. Although you may have to invest significantly more, your return on investment will more than compensate. All types of single-family and multi-family properties are waiting.


As one of the smaller cities, Prescott is home to many professionals, various colleges and universities, and diverse commercial and non-commercial real estate. With comparatively lower median home values, Prescott is a sound investment for any Arizona buyer.

Important Real Estate Investment Calculations


Of course, before you invest and start making money, you need to know how to calculate the money you’ll be making. You must consider two important calculations when conducting money transactions on Arizona like-kind properties.

These include the Capitalization Rate and the Lease Rate.

Capitalization Rate

The Capitalization Rate is simply the net operating income divided by the value of the building for sale.

Net operating income is calculated by subtracting maintenance expenses from rent. Thus, the net operating income is the expected annual return on real estate property investment.

Let’s assume a building went for sale at $10 million and its net operating income is $2 million. This would mean a capitalization rate of 20%.

Lease Rate

In addition to the capitalization rate, investors should consider the lease. With NNN properties, common area maintenance, property tax, and insurance costs must all be considered. Calculating an NNN lease requires several steps.

  • Calculate base rent by multiplying rent per square foot by the square footage of the leased area. Ensure that the calculation is reflected as an annual figure and not monthly.
  • Determine total annual expenses for property tax, maintenance, and insurance.
  • Sum the base rent, tax, maintenance, and insurance expenses.
  • Divide the resulting number by 12 to determine the monthly figure. This is the lease amount.

If any of these calculations are confusing or unclear, you’re not alone. Moreover, many people who invest through 1031 exchanges don’t know if they qualify, or think they qualify only to find out a given exchange doesn’t qualify.

There are many nuanced, complex rules and regulations.

If you have questions and concerns about 1031 exchange rules, investing in NNN realty, or anything else, do not hesitate.

Reach us at NNN Deal Finder today and we’ll help turn your low-risk Arizona investment into a robust, predictable income.

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