As we start this New Year, below are key trends, issues and points to remember regarding 1031 Exchanges.
1031 Exchange Trends and Market Update 2021
2020 was yet again another record year for 1031 Exchanges. What’s in store for 2021?
Commercial real estate is predicted to have a mixed forecast in 2021 with certain sectors, such as industrial, experiencing robust growth while others continue to struggle. With low interest rates expected to continue and the economy recovering, many CRE sectors should normalize by mid to late 2021 if the vaccines are widely available.
Another strong year for 1031 Tax Deferred Exchange transactional activity is anticipated in 2021. Two factors will drive significant transactional activity. First, borrowing rates remain historically low. Second, the pandemic has created an unprecedented need to repurpose and renovate commercial real estate to meet post-pandemic business models.
Particularly impacted are office, retail and hotel properties, given the successes of widespread working from home and use of virtual meeting technology. Even multi-family and single family rental properties now need space for use as a home office.
Section 1031 Like-Kind Exchanges provide incentive for owners who are not in a position to make significant building modifications to transfer properties into the hands of buyers willing and able to invest fresh capital and take these properties to their highest and best use for future tenant needs.
Given the dueling pandemic and economic crises, major tax reform does not appear to be a current priority of the new Administration. Nevertheless, the need to pay for pandemic relief and new legislative initiatives could make Section 1031 a target for tax revenue seekers. Our efforts to educate our policy makers to the legitimate, economically important benefits of Section 1031 continue.
1031 Exchange trends for 2021 we are anticipating:
- Continued 1031 growth in industrial, self-storage, R&D, medical/office, and multi-family sectors.
- Individual exchangers will continue to sell investment property and purchase Replacement Property in warmer climates or other locations with high vacation rental income.
- Continued increase of Replacement Property purchases of qualifying vacation home rental properties.
- An uptick in Build-to-Suit Exchanges where clients make improvements to their Replacement Properties.
- Reverse Exchange momentum will continue to grow with a shortage of Replacement Property inventory and a competitive buyer’s market.
- Retirement/Estate planning with Exchanged property will drive much investor 1031 transactional activity.
- Especially while the interest rates on financing are low and favorable, more clients will maximize 1031 potential to grow their portfolios by selling while the market is high, preserving their equity by using all proceeds to exchange into the purchase of larger or multiple Replacement Properties.
2021 Capital Gains Tax Brackets
2017 tax reform indexed the Long-Term Capital Gain rate breakpoints (whether a 15% or 20% rate) to inflation. The rates didn’t change for 2021, but the income brackets did adjust. The breakpoints for 2021 are as follows: married filing jointly $501,601+ and single filers $445,851+. The capital gains brackets are based on “Taxable Income” whereas the Net Investment Income Tax thresholds are based on “Adjusted Gross Income”. For more information
1031 Exchange Checklist
A 1031 Exchange transaction requires planning, expertise and support. Here’s a checklist outlining key steps in your exchange.
- Choose your 1031 Qualified Intermediary (QI)
- Consult with your tax professionals
- Include Cooperation Clause language in your purchase and sale agreement
- QI prepares your exchange documents
- Start searching for Replacement Property
- Sign all documents QI prepares
- Sell your Relinquished Property
- Identify your Replacement Property
- Enter into contract on Replacement Property
- Contact QI once Replacement Property escrow is opened
- Close on Replacement Property
- QI transfers funds to complete your purchase
- Your exchange is complete
Tax Straddling: Pay Taxes in 2021 or 2022?
If your transaction closed at the end of 2020 and you are unable to find new property to identify or purchase the property that you have identified, you may still be able to defer paying taxes on your capital gains until 2021. Since you will receive your 1031 funds back in 2021, in certain circumstances, since you did not have control/possession of your funds until 2021, the IRS may allow you to pay taxes on your 2021 tax return, which are due in 2022. This is in accordance with IRC Section 453(d) and requires your accountant to file specific tax forms. Ask your accountant if you are eligible to take advantage of this “mini” tax deferral.
Definition of Real Property – updated 12/2020
IPX1031 – Choose the Experts
IPX1031 focuses solely on 1031 Tax Deferred Like Kind Exchanges. As a national leader in 1031 Exchange services, IPX1031 has the financial assurances, security and expertise essentials to protect your funds and provide answers and guidance throughout the exchange process. When you choose IPX1031 as your Qualified Intermediary, you can be confident that your exchange will be facilitated in a professional manner and that your funds will be safe, secure, and available when needed. Contact IPX1031 to discuss your 1031 Exchange solution.