1031 Exchanges in a Changing Real Estate Market

April 30, 2024
1031 National Services

Conducting a 1031 exchange affords the opportunity to indefinitely defer recognizing gain (and thus indefinitely defer paying tax) when selling one real estate asset in order to acquire another. However, there are many circumstances in which real estate owners can use 1031 exchanges to achieve additional benefits as well. This includes circumstances involving dynamic real estate markets. By working with an experienced 1031 exchange expert, real estate owners can take advantage of strategically timing their transactions to both maximize their returns and minimize their costs.

There are many complex ways to structure 1031 exchanges (including delayed exchanges, reverse exchanges and improvement exchanges) to maximize the benefits available. In this article, we take a look at three comparatively straightforward examples to illustrate the types of opportunities that are available—provided that you know where to look and have a 1031 exchange expert who can guide you through the process.

Using a Delayed 1031 Exchange When Prices Are Expected to Fall

First, we’ll examine the opportunities available when real estate prices are expected to fall. Since conducting a 1031 exchange fundamentally involves selling one property and acquiring another, real estate owners can take advantage of falling prices by selling high and then buying low.

In a typical 1031 exchange, strict deadlines apply. To receive tax deferral under Section 1031, real estate owners seeking to conduct 1031 exchanges must identify their replacement properties within 45 days of selling their relinquished property, and they must close on the acquisition within 180 days of sale.

While this might not be enough time to take advantage of falling prices in the real estate market, owners can extend this timeline by conducting a delayed exchange. Conducting a delayed exchange involves working with an experienced 1031 exchange expert and qualified intermediary who can help you take advantage of key exceptions under Section 1031.  

Using a Reverse 1031 Exchange When Prices Are Expected to Rise

If prices are expected to rise, real estate owners can use a reverse exchange instead. A reverse exchange is just what it sounds like—first you buy your replacement property, then you sell your relinquished property. So, if you expect prices to go up, you can buy your replacement property while prices are still low, and you can wait to sell once it becomes more of a seller’s market.

Importantly, there are additional steps involved in conducting a reverse exchange. As a result, while it is advisable to work with a 1031 exchange expert in all scenarios, this becomes especially important when conducting a reverse exchange.

Construction Costs, Interest Rates, Rent and Other Important Considerations

Along with using well-timed 1031 exchanges to take advantage of price fluctuations in the real estate market, real estate owners can leverage delayed exchanges and reverse exchanges to minimize other costs as well. For example:

  • Construction Costs – If construction costs are expected to rise in the future, real estate owners can combine a reverse exchange with an improvement (build-to-suit) exchange to renovate their replacement properties before this happens.
  • Interest Rates – Just like changing real estate prices, parties seeking to sell one property and buy another can use a delayed exchange or a reverse exchange to avoid rising interest rates or take advantage of falling interest rates as well.
  • Rent – If trends in the real estate market suggest that rental rates are falling, real estate owners can use reverse exchanges to buy new properties and get new tenants in before rental rates fall too low.

Again, these are just examples. An experienced 1031 exchange expert will be able to walk you through all pertinent considerations and choose the specific type of exchange that is best suited to your specific goals and needs. Your 1031 exchange expert will then be able to assist with taking all of the steps necessary to conduct your exchange in compliance with Section 1031—including meeting the relevant deadlines, working with a qualified intermediary and establishing an Exchange Accommodation Titleholder (EAT) if necessary.

Discuss Your Options with a 1031 Exchange Expert for Free

If you would like to know more about using 1031 exchanges strategically to take advantage of changes in the real estate market, we invite you to get in touch. We will arrange for you to speak with an experienced 1031 exchange expert as soon as possible. To schedule a free initial consultation at 1031 National Services, give us a call at 888-872-1031 or tell us how we can contact you online today.