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A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred. Through a 1031 Exchange, you as an investor can sell investment property and accomplish a number of tax and investment goals.
Opportunities are key with your investments. Just like how CFOs and financial planners reassess stock portfolios, real estate investment portfolios should also be reviewed periodically. Why? Because as the real estate market changes, new opportunities become available and financial objectives shift. Depending on your personal circumstances, it may be a good time to reposition your portfolio utilizing a 1031 Exchange. Consider the following points to help determine if a 1031 Exchange makes sense for you and your family:
- Is your property at or close to its maximum appreciation?
Due to an increase in demand, there is a good chance your property has appreciated. Your property may be at or close to maximum appreciation. A 1031 Exchange may be a great opportunity to defer your capital gains taxes and use the equity to purchase property with more appreciation potential.
- Is your investment property not yielding enough returns?
Your apartment building, single family rental or other investment property may not be yielding you the largest return. A 1031 could increase cash flow opportunity by exchanging into a different investment property. In other words, a taxpayer can sell a single family rental home and purchase an apartment building or sell farm land and purchase a condo as long as it meets the IRS criteria. A 1031 Exchange gives you the opportunity to maximize diversification.
Why is 1031 Exchange Especially Important as we enter 2023?
2023 will offer a great opportunity for new investors to start building their real estate portfolio and for seasoned investors to further enhance and strategically build their wealth.
We anticipate both multifamily and hospitality, particularly with the growth of Airbnb and VRBO rental investment, will continue to remain popular. These asset classes generally structure their transactions as 1031 Exchanges.
Our Take on What’s in Store for 1031 Exchange Transactions in 2023:
- We anticipate 1031 Tax Deferred Exchange transactional activity should be slower than the unprecedented pandemic era volume. However, 1031 activity will remain resilient. There will continue to be many opportunities for educated investors and commercial property owners to utilize the strength of 1031 tax deferral.
- We will see continued increase of qualifying vacation home rental property purchases in warmer climates or other vacation or remote-working locations with high short-term rental income.
- We believe market uncertainty may not affect 1031 Exchange transactional activity for commercial, industrial, and multifamily apartments. These sectors will outpace office and single family rental activity.
- Last but not least, more investors will be using Adjustable Rate Mortgages (ARMs). These interest rates are typically lower than a traditional 30-year fixed, but adjust to market rate when the ARM matures in 5, 7 or 10 years. As one banker recently commented, “Customers will realize that they are dating the rate, but marrying the property.” Meaning that they can be serious about buying the piece of real estate that they want but don’t have to stay with the interest rate long-term. Once rates decline owners will refinance to a fixed rate mortgage product.
Whether you are a new or seasoned investor and want to learn more about 1031 Exchange, don’t hesitate to reach out to us!
