Using 1031 exchanges in a booming commercial real estate market

Using 1031 Exchanges to Come Out Ahead in a Booming Commercial Real Estate Market Although expected to decline 10-15 percent by year’s end after a period of atypical growth in 2015, the commercial real estate market continues strong, with billions of dollars in foreign capital continuing to flood the United States. This boom has led to low inventory, particularly in the prime areas, making it difficult, though not impossible, to acquire desirable investment properties.

The question is, How long will it be before rising interest rates send commercial real estate prices lower again?

Investors may have a brief window to maximize their portfolios. Using a “like-kind” exchange is an excellent way to upgrade one’s commercial real estate holdings while at the same time deferring the tax burden from the sale of properties that have increased significantly in value.

1031: The Basics A 1031, or “like-kind,” exchange gives investors a way to redirect profits from the sale of an investment property directly back into one’s portfolio without having to pay the capital gains tax that would ordinarily come due at the end of the transaction.

The basic IRS regulation are as follows: 

The same taxpayer who sells must be the one who buys. A single member limited liability company is treated as a pass through to the individual member.

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The new property must be identified within 45 calendar days of closing on the first property.

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The replacement property must be purchased within 180 calendar days.

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The net market value and equity of the property sold must be greater in value than the property purchased; otherwise, capital gains taxes will come due on the difference.

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“Trading Up” with a 1031 Exchange

Fortunately, “like-kind” is a broad definition; one does not have to purchase properties of equal potential merit in order to qualify. The only things that need to be equal are the equity and debt margins. It is therefore possible to liquidate sub-par properties in exchange for prime market commercial investments.

Individuals seeking to upgrade their commercial real estate portfolios through a 1031 exchange should be able to find plentiful first-time investors looking to move into the market or foreign investors with capital ready to invest. These less seasoned investors may be will to accept contingency offers, giving the investor and their brokerage company time to locate an acceptable property for exchange.

The Bottom Line Investors should consider this an excellent time to liquidate less desirable commercial properties from their portfolios. Value nationwide has risen 16 percent above the pre-recessionary highs of 2007, making it possible to recoup money lost over the last decade, and the boom market of 2015 has attracted many first-time and overseas buyers. Investors are advised to move quickly, however, as Congress is poised to make changes to the IRS code, and section 1031 remains vulnerable.

Peak Commercial — formally a Los Angeles based commercial real estate brokerage — became a Century 21 franchise in 2015. The company provides its clients with precise insights and forecasting, and they can connect investors with the 1031 exchange resources they need through an extensive network of strategic partnerships. They are also able to arrange the financing investors need to purchase commercial properties nationwide. Peak Commercial is experienced in the full range of property types, including multifamily, retail, office, industrial, and health care facilities.