Why 1031 Exchange Transaction Volumes Have Surged

1031 exchange transactions have surged in the last couple of years. As the tax plan overhaul was negotiated, some investors were concerned that 1031 exchange guidelines would change under the new plan. While 1031 exchange opportunities were eliminated for many asset classes, like wine and art, thankfully, real estate was left unchanged. As a result, 1031 exchange transaction volumes should continue to grow in the next year.

“For real estate, the ability to continue to do exchanges remains, and I think that will allow the momentum that exchanges have been driven to lately to continue,” Davin Carey, managing financial advisor at Carey & Hanna, tells GlobeSt.com. “We have seen a massive increase in volume the last several years from people that own traditional real estate and want to exchange into something different. We have been working on a lot of DST-focused real estate investment products, where it allows clients to still have a real estate-to-real estate-qualified transaction.”

While many different investment groups have been interested in transitioning out of management intensive asset classes, investors entering retirement are specifically driving this activity. “We have been seeing a lot of clients get into that, and it is a handful of groups of people that are leading that wave,” Carey says. “One has been people who are older that are into their retirement years and are simplifying their life. When we are posed with the cost of taxes, we run through the calculations with an outright sale, and usually, it is a pretty big number. That group of people have been finding DST products as a way to eliminate management headaches, not have to pay taxes and continue to receive income.”

DST properties also offer an easier transition to beneficiaries than standard real estate. “As an estate planning feature, the DST’s are owned as shares,” says Carey. “When the owner passes, if they have multiple beneficiaries, they are able to transition that real estate ownership as units going to each beneficiary.”

In addition to eschewing the management burden of residential real estate, investors are also entering 1031 exchanges as a result of the premium pricing in the market. These transactions are a way for investors to take advantage of the strong pricing while simultaneously avoiding the tax burden. “As real estate values have reflated from the global recession, many properties have exceeded the 2007 high,” adds Carey. “Many people have decided to lock things in, and that has been a big motivating factor. We will probably continue to see asset price appreciation in certain areas, but I think there are areas that are close to the near-term peak.” Specifically, these investors are looking to transition into triple-net leased assets, which have more bond-like qualities.

The pricing along with some recent uncertainties in the market will likely keep 1031 exchange volumes high through the next year. “There has been a temporary softening in the last couple of months with volatility in the equity markets, uncertainty because of political change and interest rates rising,” says Carey. “That has slowed activity in this particular area, and I think people are seeing that and deciding that this is a good time to sell before we see things decline. I think that first bite of declining prices is a significant motivator. I would expect to see volumes continue to rise.”