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1031 Exchange Trends and Market Update 2023


1031 Trends and Key Info

The recurring question is, after a robust 2022 for Commercial Real Estate and 1031 Exchange transactions, what’s in store for 2023?

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 2023

  • Prices of properties will continue to decrease.
  • Properties are on the market longer due to high interest rates
  • More investors will be using Adjustable Rate Mortgages (ARMs). These interest rates are typically lower than a traditional 30-year fixed, but adjust to market rate when the ARM matures in 5, 7 or 10 years. As one banker recently commented, “Customers will realize that they are dating the rate, but marrying the property.” Meaning that they can be serious about buying the piece of real estate that they want but don’t have to stay with the interest rate long-term. Once rates decline owners will refinance to a fixed rate mortgage product.
  • As interest rates continue to rise and property values begin to decline, more “all-cash” investors will utilize 1031 Exchanges.
  • As the market has softened, more investors will patiently wait to sell, or convert all or part of their primary residence to qualifying investment property as they expect prices to rebound.
  • Market uncertainty may not affect 1031 Exchange transactional activity for commercial, industrial and multifamily apartments. These sectors will outpace office, and single family rental activity.

Continued increase of qualifying vacation home rental property  purchases in warmer climates or other vacation or remote-working locations with high short-term rental 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 2023 or 2024?

If your transaction closed at the end of 2022 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 2023 taxes are due.

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 2023 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.