As the home market has recovered significantly compared to the situation just a decade ago, and commercial real estate is also on the rise, many property owners are utilizing the 1031 exchange program to save on the cost of switching from one property to another of “like kind.” The IRS provides this tax deferral program to investors to help the mitigate the cost of getting out of a bad investment or moving to another area.
This is highly beneficial because it stops you from having to pay capital gains taxes on the sale of the old property. That might not seem like a huge deal, but on a sale of a million dollars or more it can add up to significant sum of money.
Here are five reasons why the 1031 exchange has been picking up steam lately:
1. Using the 1031 Exchange While It Lasts.
With laws in a constant state of uncertainty due to things being repealed and funds being rolled back, there’s no guaranteeing that the 1031 exchange will still be around next year or the year after that. To ensure you don’t get stuck paying the capital gains taxes on the sale of your old investment property, it would be wise to go ahead and take advantage of the program while it lasts.
Many investors are very aware of the current state of the economy as well as the political landscape, and it’s apparent that things are changing rapidly for government-funded programs, so it makes sense to find a 1031 exchange property to capitalize on the option while it still exists in its present form.
Regardless of political preference, most investors can agree that you should seize opportunities to save large sums of cash on highly important transactions. Waiting and procrastinating only serves to increase the odds of missing out, and this sense of urgency is undoubtedly the primary motivator for most investors using the 1031.
2. Getting Into a Different Investment While it’s Still Available.
Another thing that creates urgency within the 1031 exchange program is the fact that you have to find a property that matches yours and qualifies for an exchange. Doing this is not always easy, so when the opportunity presents itself you don’t want to wait around and let it pass.
For this reason, the sector tends to be rather aggressive when it comes to selling and promoting the properties. Likewise, due to the qualifications involved, it’s important for buyers to be vigilantly searching for and comping lists of prospective replacement properties.
In recent years, many properties have been listed for sale, so investors who have been waiting for the right match are finally finding their exchange properties and taking action. The frequency of these exchanges varies depending on the area, property value, and local housing market statistics.
3. There are More 1031 Exchange Properties on the Market.
As mentioned, there are now more properties on the market that are eligible for 1031 exchanges, primarily because of the amount of development happening in subdivisions and cities across the country. Any time there is expansion in the manufacture or construction of real estate there are usually lots of sales to follow.
With new buildings and homes being constructed on a yearly basis and many investors and homeowners looking to sell, the market is prime for someone who has been waiting for the perfect match to do a 1031 exchange. Essentially, any time it’s a buyer market there will be lots of 1031 exchanges going on because property owners are tempted by more appealing options to buy.
4. Increased Awareness on the Subject.
Of course, another reason why the 1031 is gaining more popularity is because more people are discussing it online and recommending it to clients and others seeking advice. This trend applies not only to this type of exchange but also to many other topics related to saving money while buying or selling a home.
When investors become aware of an option that is legitimately going to save them a considerable amount of money, it’s only a matter of time before the majority catches on. Unfortunately, with more people using the option it’s also more likely to be overused and abused to the point where it may be revised or repealed eventually, so that adds to the urgency aspect.
Of course, there’s a strong curiosity surrounding this subject, which fuels the demand for details about it, and in turn drives up the supply of relevant information. With such tips and tricks available at your fingertips, it’s no wonder people are more savvy to beneficial options like this nowadays.
5. Commercial Incentive to Sell.
The fifth and final reason why 1031 exchanges are becoming more popular is related to the motive to sell. Any time you have a group of people marketing something for an extended period of time, the end result is typically an increase in sales and transactions.
This simple principle can be seen in the 1031 sector of the housing market because you not only have property owners actively trying to market their properties, you also have agents and other third-parties who stand to gain from the deals as well. As always, whenever there is money to be made and saved from multiple angles, people will gather.
The Importance of Property Selection and Patience.
The prospect of a 1031 exchange can be exciting, but don’t get too overzealous and start considering the first group of houses you stumble across. Try to remember that this is an investment you’ll probably be dealing with for years, so you want it to be something that you actually want to buy.
Oftentimes investors will make the mistake of jumping on a 1031 exchange property simply because the option will save them money, without paying closer consideration to the more important aspects of the property assessment. Use the 1031 exchange as a tool when it’s applicable, rather than trying to force it to happen in an effort to save money and execute a deal as soon as possible.
Although there are rare cases in which one of the first properties viewed will be the perfect match for the investor, in most cases they would stand to gain by practicing patience and examining as many properties as possible before making an informed pick.