But are these investor-friendly options a mere flash in the pan designed to spike interest, or are they here to stay? After all, we’re talking about your hard-earned money here, so you’d like some certainty! So let’s explore the staying power of the 1031 Exchange.
Why 1031 Exchanges Are a Long-Term Investing Solution
1. The NAR Element: There’s a very powerful element behind the 1031 Exchange’s success: the National Association of Realtors (or NAR). Consider that the NAR is America’s largest trade association (at over 1.1 million members) and maintains a heavy Washington lobbying presence. These facts allow any doubts regarding the 1031 Exchange’s staying power to dissipate. In other words, because the 1031 Exchange is in the interest of its members, the NAR is interested in seeing it succeed! And in 2016, $45.2 million of their money was invested in making sure that options like the 1031 Exchange would continue to be present within the U.S. tax code.
2. 96 Years And Counting. Does a process that’s been around for about 100 years sound like a trend? Consider that the original 1031 Exchange was legislated into law with the Revenue Act, way back in 1921! The investor favorite was based on the premise that: “a property owner who re-invests his/her sale proceeds and retired debt into a like-kind replacement property has an economic position that has not changed.” It’s been helping investors dump their failing assets and expand their portfolios with more promising properties ever since.
3. $3.2 Billion (With a “B”)! Lest you think that either the presence or profitability of the 1031 Exchange option is waning, consider the following: The estimated value of total taxes deferred from the 1031 Exchange— in 2012 alone— was $3.2 billion.
4. The Anti-Stock. Unlike stocks, 1031 Exchange’s aren’t a “hot” option that stays hot only as long as a given product does. This is an important distinction, because as the popularity (and sales) of a product can fade, so can the value of its stock. Take the case of Skull Candy (or SKUL)— a trendy brand that was on the rise a few ago— only to see its stock drop by 52% over the course of a few months. A 1031 Exchange, on the other hand, holds its value year round, each time you go to perform it. In this sense then, you can say that it’s the anti-stock.
5. It’s Not Going Anywhere! Despite the usual rumors and D.C. intrigue, there’s no hard evidence to suggest that the 1031 Exchange is going away. In fact, eliminating its provision in the tax code would only hurt the real estate market. This, combined with the fact that we have a decidedly real estate-centric president means that the 1031 Exchange is likely to be a viable option for investors for years to come.
In summary: The 1031 Option is perfect for the aging of America. The management of the multi-family or the multi-tenant retail is very management intensive. Is this something that you will want to hand over to your children? The Triple Net 1031 is a way to keep real estate without the tax burden or the management headache.
In previous articles, we detailed the intricacies of the 1031 Exchange, as well as the various interests invested in its success. Of particular note were the option’s: 1). convenience to real estate investors and 2). status as a tax-shelter. Below, we discuss a variation on the original that’s likely to pique your interest— the Reverse 1031 Exchange. But first, let’s perform a quick review of the original option.
The 1031 Exchange: a Brief Review
A 1031 Exchange basically refers to a “swap” of one investment, asset, or business for another; and most involve exchanging various forms of real estate.
While in other instances this practice would be taxable as a sale (and you’d have to pay those taxes immediately), if the exchange falls under section 1031 of the tax code (i.e. it qualifies as a “like-kind exchange”), you’re able to defer them.
Also of note, as it regards this option, is how the property which you are exchanging for (i.e. the one you’re giving up) is relinquished prior to the acquisition of your new property.
Aiding Your Long-Term Investing Goals
Clearly, this option plays to investors’ long-term goals by allowing them the flexibility to:
1. get rid of under-performing assets.
2. generate greater amounts of income.
3. build larger portfolios.
But what about the lesser-known Reverse 1031 Exchange option? What’s in it for you?
The Reverse 1031 Exchange
The Reverse 1031 Exchange is the opposite of its original version (or the “Delayed Exchange”). Whereas the latter requires investors to relinquish their property(ies) before acquiring any new one(s), the reverse option allows for the acquisition of new property (ies) first (while the relinquishing can come after). This distinction is a subtle but important one, as we shall see.
- Ability to take advantage of changes in the marketplace (like buying a hot property that’s only available for a limited time).
- Helps if you want to relinquish your existing property, but lack a buyer.
- A way to avoid the IRS requirement that says the new property must be identified within 45 days of the old one’s closing.
However, the Reverse option is not without its own set of rules and requirements, which should be studied carefully beforehand.
Who Should act
As stated previously, 1031 Exchange’s are geared toward investors who crave convenience, tax benefits, and portfolio growth; so if you’re best described as an investor who detests “staying pat” while preferring to stoke the fires of their ambition, this option may be a good fit. The Reverse 1031 Exchange only serves to give you added flexibility when it comes to meeting your investing goals. So let the wheeling and dealing begin!
From the Jan 17-30, 2017 Long Beach Business Journal (page 6):
Interior improvements are underway at what will be the new home of the Long Beach Firefighters Local 372 at 2201 Cherry Ave., across the street from the Signal Hill City Hall. The 7,500 square foot building was purchased from Robert and Judith Pyre for $1.5 million. The Business Journal was unable to get its calls returned to determine a move-in date. The union currently leases offices at 3333 Spring St. The transaction was handled by INCO Commercial’s Paul Phillips, Bill Townsend, and Brad Miles. (Photograph by the Business Journal’s Larry Duncan.)