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1031 Exchange Trends and Market Update 2024


1031 Trends and Key Info

After a challenging 2023 year for Commercial Real Estate and 1031 Exchange transactions, what’s in store for 2024?

With a new business cycle notably marked by higher interest rates, inflation, and slower growth, the Commercial Real Estate industry has a more pessimistic outlook which will also impact the number of 1031 Exchanges that may occur. It will be a year of challenges and of opportunities.

Multifamily and industrial are predicted to remain popular asset classes, and retail with repurposed class usage, and hospitality, particularly with the growth of Airbnb and VRBO rental investment, will continue. These asset classes generally structure their transactions as 1031 Exchanges.

With the anticipated market challenges, 1031 Tax Deferred Exchange transactional activity should be slower than the unprecedented pandemic era volume. However, 1031 activity will remain resilient. There will continue to be many opportunities for educated investors and commercial property owners to utilize the strength of 1031 tax deferral. Click to read CRE market trends in entirety here.

1031 Trends for 2024

    • As long as interest rates are relatively high and quality inventory is limited, Reverse, Improvement and Build-to-Suit Exchanges will continue to be popular.
    • Traditional financing challenges will spur seller financing with sellers utilizing 1031 Exchanges to maximize this strategy.
    • Most CRE asset classes including multifamily, industrial, and retail are poised for strong activity utilizing 1031 Exchanges to defer taxes.
    • There will be an uptick in management intensive properties being exchanged into passive types of investments such as NNN and DSTs.
    • Cities and States that are not landlord/investor friendly will continue to see money being 1031 Exchanged into more real estate friendly areas.
    • There will be growing 1031 opportunities in pro ADU states for homeowners with rental ADUs. An accessory dwelling unit, usually just called an ADU, is a secondary housing unit on a single-family residential lot. When these properties are sold, the taxpayer may use the profits from the ADU to exchange, tax deferred, into another type of investment property.
    • We will continue to see investors exchange into areas that have warmer climates, low cost of living/lower taxes and are retirement friendly.

    2024 Capital Gains Tax Brackets

    2017 tax reform indexed the Long-Term Capital Gain rate breakpoints (whether a 15% or 20% rate) to inflation. The actual rates didn’t change for 2024, but the income brackets did adjust slightly. The breakpoints for 2024 are as follows: married filing jointly: $583,750+ and single filers: $518,900+. The capital gains brackets are based on “Taxable Income” whereas the Net Investment Income Tax thresholds are based on “Adjusted Gross Income”.

    1031 Exchange Checklist

    A 1031 Exchange transaction requires planning, expertise and support. Here’s a checklist outlining key steps in your exchange. 

    1. Choose your 1031 Qualified Intermediary (QI)
    2. Consult with your tax professionals
    3. Include Cooperation Clause language in your purchase and sale agreement
    4. QI prepares your exchange documents
    5. Start searching for Replacement Property
    6. Sign all documents QI prepares
    7. Sell your Relinquished Property
    8. Identify your Replacement Property
    9. Enter into contract on Replacement Property
    10. Contact QI once Replacement Property escrow is opened
    11. Close on Replacement Property
    12. QI transfers funds to complete your purchase
    13. Your exchange is complete

    Tax Straddling – Pay Taxes in 2024 or 2025?

    If your transaction closed at the end of 2023 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 your 2024. Since you will receive your 1031 funds back in 2024, in certain circumstances, since you did not have control/possession of your funds until 2024, the IRS may allow you to pay taxes on your 2024 tax return, which are due in 2025. 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

    This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy, or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such. This information should not be construed as legal, regulatory, tax, personalized investment, or accounting advice. This message (and any attached materials) is for the sole use of the intended recipient(s) and may contain information that is privileged, confidential and exempt from disclosure under applicable law. Any review, dissemination, distribution or duplication of this communication is strictly prohibited

    This data is not meant to replace Adviser’s portfolio management/performance reporting systems or brokerage statements. Please consult your reports for actual performance data before making any decisions based on this information. Accordingly, reliance upon information in this data is at the sole discretion of the reader. Assumptions on returns are just that and may or may not come to fruition. Actual returns may not be as projected and are for illustrative purposes only.

    Neither EFR (Exclusive Financial Resources, LLC), it’s officers or employees are authorized or permitted under applicable laws to provide tax or legal advice to any client or prospective client of EFR. The tax related information contained herein or in any other communication that you may have with a representative of EFR should not be construed as tax or legal advice specific to your situation and should not be relied upon in making any business, legal or tax related decision. A proper evaluation of the benefits and risks associated with a particular transaction or tax return position often requires advice from a competent tax and/or legal advisor familiar with your specific transaction, objectives and the relevant facts. We strongly urge you to involve your tax and/or legal advisor (or to seek such advice) in any significant real estate or business related transaction.

    If you would like to find out more about 1031 Exchanges and 2024 Trends please give Exclusive Financial Resources a call at (980) 242-2533, email Louis Herford at LHerford@Exclusive1031.com or schedule a 15-minute discussion here.