A 1031 exchange allows a federal taxpayer, either domestic or foreign, to defer capital gains and recaptured depreciation taxes when selling property held for productive use in a trade, business or investment, given like-kind replacement property is acquired within 180 calendar days from the sale of the old property. The types of property that can be exchanged include real, tangible and intangible personal property. Current market trends depend upon the type of Qualified Intermediary — institutional or non-institutional — and whether the exchange is oriented toward mass like-kind exchange programs or niche market such as artwork, livestock or vintage cars.
Current Market 1031 Exchange Trend
Each year, the Joint Committee on Taxation estimates the revenue loss for the over two hundred tax expenditures currently authorized and signed into federal law. Deferral of gain on like-kind exchanges is an estimated $3.2 billion in 2012 with an estimated increase to $3.7 billion in 2013. Should the long term capital gains rate sunset as is scheduled at the end of 2012 from 15 to 20 percent, there should be an effective increase in gain deferral 1031 exchanges. If not, the estimates suggest nearly a sixteen percent increase in total exchanges for 2013.
Analysis of Atlas 1031 Exchanges
As an accommodator since 2003, I have watched the types of exchanges grow from primarily vacation properties to timberland, farms and ranches, franchises, multi-family and commercial buildings, international properties and personal property exchanges of aircraft, precious metals and equipment. The majority of exchanges are initiated with closings in the first six months of the year. Interest in 1031 exchanges appears to be cyclical, peaking in April/May and bottoming out in September/October. Though there are always exceptions, most exchanges happen within thirty to sixty days of contact, while initial contact for larger commercial exchanges is six to nine months prior to closing.
The number of exchanges has increased over 2011, with activity increasing from the sale and auction of farms in the Midwest, restaurant franchises, timberland in Mississippi, Alabama and Georgia to improvement property exchanges in the Sunbelt states of California, Arizona and Texas. Vacation properties are once again beginning to utilize 1031 exchanges to defer the capital gain. The inventory of short sales and foreclosures is slowly being absorbed along the Gulf Coast from Mississippi, Alabama and Florida, giving way to an increase in activity by local realtors actively marketing and selling investment property.
The forward exchange represents the majority of the type of exchanges accommodated, followed closely by reverse exchanges where the new property is acquired before the sale of the old property. The number of first time exchangors exceeds the repeat exchangor with an equal mix of individual to corporate clients. Qualified escrow accounts are used in nearly half of our exchanges, with use determined by the state law requirements, when the exchange proceeds value exceeds the FDIC $250,000 coverage and whether the client desires dual-signature authorization for wire outs.
If you are not familiar with a 1031 exchange or would like to update your understanding, click below to receive a complimentary eBook on “Ten Reasons Why a 1031 Makes Sense” or contact our office at 800.227.1031 to ask questions. Visit our web site to download anyone of thirteen complimentary downloads for realtors, lawyers, title escrow officers, CPAs, ranchers and farmers, timberland, franchise and aircraft owners.
