De-converting Condos and 1031 Exchanges
The saying “what is old is new again” is perfectly illustrated with the latest real estate trend. For decades developers have purchased apartment buildings and then converted and sold the apartments as individual condominiums to meet demand for affordable home ownership, particularly in urban areas.
Times have now changed and nationally a strong demand for rental apartments often exceeds the supply. Developers have seized the moment to convert (or de-convert) condominium buildings back into apartment buildings. Fueled by the opportunity to purchase condominiums with low interest rate loans and then quickly lease the apartments at today’s rising rents, conversions are a fast growing sector.
As quoted in the Chicago Tribune, Doug Imber, President of Chicago based Essex Realty Group states, “Now, after the housing bust, the allure of owning has faded, and getting a loan for a starter condo is tough. So people - especially millennials - want to rent, or they must rent because they cannot come up with a down payment.”
However, the process of acquiring a building by purchasing the separate condominiums from individual owners is usually a major challenge even for the veteran developers. The incentive to the owners is that the offer price is typically higher than they would get if they tried to sell their units on their own.
Another incentive for owners who currently lease their units is that they can sell to the developers and purchase other real estate, tax deferred, by easily structuring the transaction as a 1031 Exchange. Providing the investor purchases real estate of equal or greater value to the condominium, they defer payment of their capital gains tax, state income tax, healthcare tax and the recapture tax on previously declared depreciation.
Of course, even with the incentive of competitive offers and tax deferred profits, developers often cannot convince all of the owners to sell their units. Some states make it easier for developers to acquire entire buildings. For example, in Illinois, if a developer convinces 75 percent of the unit owners to sell their units, stubborn owners can be forced to sell their condominiums.
The challenge of dealing with individual condominium owners to acquire buildings is best suited for the most patient and resilient developers. But as long as the demand for apartments continues to soar, this will be a growing and intriguing niche of the real estate market and one that has great 1031 tax benefits for condominium investors being suited by developers.
Investment Property Exchange Services, Inc. (IPX1031®) is a Qualified Intermediary providing a full range of tax deferred exchange services across the country including forward, reverse and build-to-suit transactions. 1031 Exchanges are all we do here at IPX1031®, so we know the ins and outs of the safe harbor regulations. We pride ourselves on not only being the industry leader in service and security, but also strive to be an information resource. As the nation’s largest 1031 Intermediary, IPX1031® has offices throughout the country and a highly skilled team of exchange attorneys, CPAs, coordinators and sales executives to provide quick answers. We look forward to helping you and/or your clients maximize qualifying investments through a 1031 Exchange strategy.
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