Will 1031 exchanges pick up again if capital gains taxes go up?

There has been speculation around the topic of capital gains going upward during the next Presidential administration because of things said on the campaign trail. While many of the articles have talked about how this will impact those with money in the stock market, there is also the very real view of how this will impact real estate investors.

Over the past several years while the long term capital gains rate has been at 15% we have seen many RE investors choosing to just take the tax hit on sales of investment property rather than utilizing a 1031 exchange. Part of the reason has been that when the market was running fast it didn’t always make sense to find another property on the open market because prices were over-inflated, a lot of properties didn’t cash flow, and it might not have made financial sense to make the change since you wouldn’t really get a cost basis adjustment. So, some of these clients just sold and took the proceeds. In some cases using the gains as an offset for losses in the stock market. For me, the biggest reason not to buy over the past couple of years was the fact that many properties couldn’t cash flow. Why would you want to sell and trade up for a property that couldn’t carry itself?

A lot of those people who did decide to jump into the market at the highest point (generally 2006 up to early 2007) have taken a bath and lot of those houses, condos and small multifamily properties are in foreclosure or in short sale position. We see them on the market in every area of Puget Sound and King County. We’ve also been hearing of more and more commercial properties fitting into this definition too. More about that another time though.

Back to my main topic…. The timelines that are involved in a 1031 might restrict an investor from finding an appropriate property in time. That’s the thing with exchanges…. if you don’t hit the timelines then you pay tax just as you would have if you didn’t try to employ the 1031 tax-deferred exchange. One other thing that might prompt exchanges is the new rule many lenders have of restricting RE investors to a maximum of 4 loans. It might make sense to do exchanges to larger properties if you can’t add to your portfolio in other ways. Can’t have lots of small multi-family or single-family homes? Then, perhaps consider selling a few multi-family properties and move up to a commercial sized property with 5 or more units.

I’ll be interested to see over the coming years how it changes. Anyone else got a comment or opinion on the subject?

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Will 1031 exchanges pick up again if capital gains taxes go up?

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Will 1031 exchanges pick up again if capital gains taxes go up?

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