Wednesday, November 10, 2010

A Decade of Deferrals

According to the IRS, in 2002 individuals entered into 143,184 1031 exchanges. By 2005 that number had peaked to 283,560. Everyone can guess what happened next. The market dropped - dragging investments down with it. As a result, anywhere between 59,192 and 78,923 exchanges were estimated to be performed by individuals in 2008. However, it’s likely we’ve already returned to 2002 level numbers.

Institutional investors and traditional buy-and-hold investors believe the market is improving- thus, why "sell in a soft market?". However, clients with low-basis property that have certain events (death, retirement, financial distress) trigger property sales are opting to conduct like-kind exchanges. The natural processes of the life cycle along with an improving market have forced many investors out of the trenches.

An example would be an apartment building investor retiring to Florida and swapping out of an Arlington Apartment building and buying a Walgreens NNN lease as replacement property. The client gets cashflow without the "toilets, tenants, and trash". The market may not be perfect – but time waits for no one. Many of the baby boomers who could afford to wait just a few years ago are acknowledging and accepting current realities.

Another interesting and timely example are landowners selling to energy companies drilling on their property. This low-basis acreage with no depreciation benefits is great fuel for an income-producing commercial replacement property whether it be retail, industrial, or office. These clients often do not know that their land is "like-kind" with commercial real estate, and they do not know that passive real estate investments are out there that they do not have to actively manage.

Clients should really try to plan for both capital gains events and estate events. Unfortunately too much attention is put on deductions, current income, and economics of deal. Investors now face 25-50% in capital gains taxes upon disposition and upwards of 45-55% in estate taxes. This level of taxation will erode a substantial amount of the cash you will net from an investment when attempting to build real wealth.


  1. Great insight into the current 1031 market. The like-kind exchange activity 2010 over 2009 has increased 100% especially in the commercial vertical. Those Exchangors holding vacation property in Florida purchased 2004 - 2007 are most likely underwater.


    Andy Gustafson
    Atlas 1031 Exchange, LLC

  2. Thanks for the informative post. After having read this post, I have to carefully plan our next commercial lease. Florida, I think, is a great state, and I really want to stay there for good. I just have to do a little "future sight", and see if going to Florida and getting that commercial lease is a great idea, or not.

  3. This post has given me a warning to carefully strategize my next purchases for my new business. I really want to earn as much without my money being completely eaten by tax deductions. I've been looking for an office space somewhere near the nation's capital. Someone has recommended this office space in Dulles, VA, which is near the Dulles Airport. Other than that, there's this office space in Reston, VA, which is closer to the capital. Both are good spaces, but I have to consult all of my colleagues so that we can carefully plan our next purchase. We all don't want to be eaten by tax.