1031 Exchange Activity Picks Up
Between 2002 and 2007, real estate investors and developers built tremendous wealth and preserved significant equity by using tax-deferred exchanges under Section 1031 of the IRS Code. During the economic downturn, exchanges were used less frequently for preserving equity from the appreciation of real estate—mainly due to offsetting losses from other transactions or a general erosion of equity altogether. More often, over the past few years taxpayers used exchanges as strategy for deferring potential tax liability from short sales and foreclosures.
However, taxpayers are again relying on exchanges now that some real estate assets are selling at a gain.
In August 2010, the volume of exchange transactions began to increase significantly. This trend started with developers and investors selling singular assets and asset portfolios to large REITS and private equity funds that were looking to purchase assets with cash. Class A and B multifamily assets and single-tenant NNN assets were their typical targets. These purchases fueled the start of new construction exchanges by many of the selling developers, especially in the single-tenant NNN industry.
The exchange trend has spread to larger, more institutional assets in the office and retail sectors. Grocery-anchored retail centers have also been at the center of exchange activity. The common underlying characteristic of the assets being sold in these exchanges has been the stability of the asset, often stemming from strong credit tenants.
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Bryan E. Cole
NAI Keystone Commercial & Industrial, LLC
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