The last several years in the 1031 exchange industry have been to say the least challenging. Don’t get me wrong, I love doing what I get to do everyday. What is that? As a qualified intermediary, I help individuals and companies defer capital gains taxes through what is known as a 1031 exchange.
1031 Exchange Trends
Since late 2006, real estate prices for investment properties began to stall, slowly falling into free fall from 2007 through 2010. States effected the most were those that also saw the rapid appreciation of 25 to 30% for the period 2003 – 2005 such as Florida, Nevada and California. I saw first hand how condominiums and rentals properties along the Gulf Coast from Texas to Florida experienced the highs and lows of perceived value compounded by natural disasters of hurricanes and an oil spill. Today, I see the following trends in the 1031 exchange market:
- all cash buyers both individuals and corporations;
- a desire to diversify replacement property into oil and gas royalties as an alternative to real estate;
- unallocated gold and silver bullion exchanged for the physical metal;
- bonus depreciation for corporations has reduced the need for 1031 exchanges in like-kind exchange (LKE) programs;
- more reverse 1031 exchanges than the traditional forward acquiring under valued properties in preparation for the current upward trending business cycle.
The Joint Committee on Taxation estimates a 21.88% increase in the value of tax deferrals from $2.5 billion in 2011 to $3.2 billion in 2012. This is up from $2.1 billion in 2010. The majority of those exchanges or 62.5% are estimated to be by corporations in 2012.
The individual exchange will be a slower to rebound given Revenue Procedure 2008-16 effective March 10, 2008 requiring vacation rental properties to be held for two years followed by the replacement rental property to also be held for two years to qualify for a 1031 exchange.
- Is the 1031 Exchange a Worthwhile Tax Expenditure?
- What is Bonus Depreciation and Impact on 1031 Exchanges?
Conclusion
Unless the 1031 exchange is eliminated as a deficit reduction measure, the number and value of the tax expenditure is estimated to continue a slow rebound from the 2003 – 2005 era when the estimated value of tax deferrals reached $73.6 billion in 2004.
When considering whether a 1031 exchange makes sense, consider other reasons than just the tax deferral. If you are not sure, call us for a free consultation.
What You Get
- Rapid response within 12 hours of request;
- Thoroughness and expertise of a Certified Exchange Specialist®;
- The value of your potential exchange;
- The estimated recognized tax if an exchange is not initiated;
- Email summarizing plan of action and details of consultation.
What You Don’t Get
- A sales call;
- Mumbo jumbo technical jargon;
- Responses that are not compliant with the 1031 code.
