1031 Exchange Problems Amid COVID

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1031 Exchange Problems Amid COVID

David Haynes
Investor · Philadelphia · Member since 2020 · 112 posts · 150 votes

I see three forces complicating things for many buy-and-holders using the 1031 exchange: 

1) COVID is causing many to diversify their holdings to mitigate potential losses. In other words, their need to use the 1031 exchange has increased. 

2) The shortage of listed properties is complicating the 45-day search for another property. They are having to decide between paying capital gains tax by missing the deadline or paying higher for scarce properties. 

3) Biden's proposed tax plan is threatening the highest-earning 1031 exchangers (please don't make this a political debate). The point is, investors are losing trust in their previous way of avoiding taxes.

Feel free to add to my list of forces. This is by no means exhaustive or detailed.

I'm really wondering where everyone's minds are at and how you're coping with these forces...

For those needing to sell properties now, are you struggling to sell them? For your next property, how are you finding ones that make financial sense? Are you paying higher prices for your next property just to meet that 45-day deadline? Are you losing faith in the exchange itself? Have any of you considered Delaware Statutory Trusts? 

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Alex Olson
Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
6y
Originally posted by @David Haynes:

I see three forces complicating things for many buy-and-holders using the 1031 exchange: 

1) COVID is causing many to diversify their holdings to mitigate potential losses. In other words, their need to use the 1031 exchange has increased. 

2) The shortage of listed properties is complicating the 45-day search for another property. They are having to decide between paying capital gains tax by missing the deadline or paying higher for scarce properties. 

3) Biden's proposed tax plan is threatening the highest-earning 1031 exchangers (please don't make this a political debate). The point is, investors are losing trust in their previous way of avoiding taxes.

Feel free to add to my list of forces. This is by no means exhaustive or detailed.

I'm really wondering where everyone's minds are at and how you're coping with these forces...

For those needing to sell properties now, are you struggling to sell them? For your next property, how are you finding ones that make financial sense? Are you paying higher prices for your next property just to meet that 45-day deadline? Are you losing faith in the exchange itself? Have any of you considered Delaware Statutory Trusts? 

I think your first 2 points are valid and interesting. However, a person can always buy something at the same price they are selling and cash out refinance or keep in the property to have it cash flow really well. I think people over think it. Also, working with a 1031 agent like myself is key to making sure you have a great transaction. For your 3rd point, I think it is premature. Virtually everyone in Congress owns investment real estate. The fact that the richest may lose some of their 1031 benefits is most likely a scare tactic aimed at politics...and not a real business scenario for quite a long time. 

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  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    6y
    Originally posted by @David Haynes:

    I see three forces complicating things for many buy-and-holders using the 1031 exchange: 

    1) COVID is causing many to diversify their holdings to mitigate potential losses. In other words, their need to use the 1031 exchange has increased. 

    2) The shortage of listed properties is complicating the 45-day search for another property. They are having to decide between paying capital gains tax by missing the deadline or paying higher for scarce properties. 

    3) Biden's proposed tax plan is threatening the highest-earning 1031 exchangers (please don't make this a political debate). The point is, investors are losing trust in their previous way of avoiding taxes.

    Feel free to add to my list of forces. This is by no means exhaustive or detailed.

    I'm really wondering where everyone's minds are at and how you're coping with these forces...

    For those needing to sell properties now, are you struggling to sell them? For your next property, how are you finding ones that make financial sense? Are you paying higher prices for your next property just to meet that 45-day deadline? Are you losing faith in the exchange itself? Have any of you considered Delaware Statutory Trusts? 

    I think your first 2 points are valid and interesting. However, a person can always buy something at the same price they are selling and cash out refinance or keep in the property to have it cash flow really well. I think people over think it. Also, working with a 1031 agent like myself is key to making sure you have a great transaction. For your 3rd point, I think it is premature. Virtually everyone in Congress owns investment real estate. The fact that the richest may lose some of their 1031 benefits is most likely a scare tactic aimed at politics...and not a real business scenario for quite a long time. 

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @David Haynes, All right I'll chime in.  #1 absolutely.  Many folk aren't feeling as good about _____ (fill in the blank with the sector of your choice).  That's the beauty of the 1031.  You can move geographical locations.  You can move from commercial into residential or residential into farmland or any other type of investment real estate (how about one of those small Kansas towns where you can own all of downtown for the price of a small LA condo - and there hasn't been a covid positive within 5 counties :)

    Number 2 cuts both ways - The best time to sell and start a 1031 exchange is the worst time to finish one (a sellers market).  And the worst time to sell and start an exchange is also the best time to finish one (a buyers market).  A lot of investors now are taking the sale and starting the exchange thinking that the next 60-90 days inventory will start to open up of strapped landlords may become more flexible.  The the real truth is that 1031 investors are much less worried about and sensitive to the macro environment.  They evaluate each property on it's own merit.  And if they don't sell then they can't lose money.  And if they do sell and can't complete a 1031 they don't lose money because as long as your paying tax you're not losing money.  Once you get into the rhythm of a 1031 philosophy of investing you become very slow and long horizoned.

    Number 3 - I'm not going to worry about that until it happens.  Big talk like that has happened in every election because there's no such thing as a bad tax - as long as someone else is paying for it.  Ya never know.  But I'm guessing it has as much chance of being voted out in the next 24-36 months as the $2000/month covid stipend that the vice president nominee is  calling for being voted in.  Right now 1031 is a great opportunity so use it till it's gone.  Dance till the music stops and don't waste the last song.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @David Haynes:

    I see three forces complicating things for many buy-and-holders using the 1031 exchange: 

    1) COVID is causing many to diversify their holdings to mitigate potential losses. In other words, their need to use the 1031 exchange has increased. 

    2) The shortage of listed properties is complicating the 45-day search for another property. They are having to decide between paying capital gains tax by missing the deadline or paying higher for scarce properties. 

    3) Biden's proposed tax plan is threatening the highest-earning 1031 exchangers (please don't make this a political debate). The point is, investors are losing trust in their previous way of avoiding taxes.

    Feel free to add to my list of forces. This is by no means exhaustive or detailed.

    I'm really wondering where everyone's minds are at and how you're coping with these forces...

    For those needing to sell properties now, are you struggling to sell them? For your next property, how are you finding ones that make financial sense? Are you paying higher prices for your next property just to meet that 45-day deadline? Are you losing faith in the exchange itself? Have any of you considered Delaware Statutory Trusts? 

     The tight timeline of the 1031 ID property to buy has kept me from doing one until now.  Ive been selling 1 to  2 singles every year by owner since 2017 but have never exchanged until now. Nobody wants to be a motivated buyer.

    I made sure the difficult side was locked down first. For most its the buy side I'd imagine. Mine was the sell side. In 2003 I bought a rural (1200 people) 1906 10 unit mixed-use building dirt cheap (14 cap) directly from the main bank in town as an REO. Half downtown was boarded up and a lot of people thought I was nuts.

    Local market cap rates have compressed to 6.5 and I put a shady FSBO sign in the window last July. A few weeks ago I got a good, non-corporate buyer. It was important to me to sell to someone that gave a rip about my tenants. Corporate types are also more likely to bust me down hard at inspection time.

    Now to find a seller.  While under contract to sell, not wasting time, I called on a few MF owners I've cultivated relationships with over the years and found a seller, but he wanted to carry the financing.   Locked that one up, but not as an exchange.

    I found my seller shortly after though and we are scheduled to close 2 days post closing of my 10 unit sale.  Nice little 11 unit portfolio of 3 plexes on adjacent parcels.  No agents and management already in place. 

    Haven't selected a QI yet . First Am has 1 of course and will do it for $1k, but without help filling out the 8824 I don't see the point of having one at all.  That's literally the only service I need as far as I know.  I 'need' one to prevent having 'constructive receipt' of the funds I won't be receiving.  LOL

    The point is to take care of the difficult side first and to be in your market to know who to talk to when it's time to move.  For most, that's probably a good broker.  For some like me that hyper target neighborhoods and know who owns them, it's the owners themselves.  Good luck to you!

    1Reply
  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    Good post, @David Haynes. Here's one to add to your list of COVID issues: The COVID travel restrictions have caused it harder to go see properties. And to manage them from a distance. Though these restrictions are lighter now, airlines have lessened routes and this could continue. This could be a time to look at alternatives that can be managed by 3rd parties. Like Delaware Statutory Trusts and Deferred Sales Trusts. 

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  • Andrew HoganPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
    6y

    Perhaps this will force investors to consider the other possibilities of reducing tax exposure... 

    there's more than one way :) 

    1Reply
  • John Fish
    Rental Property Investor · Philadelphia, PA · Member since 2020 · 37 posts · 21 votes
    6y

    @David Haynes a good lawyer can buy you more time..there is a way to extend by 6mo

    1Reply
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