Is Now The Right Time To Sell and 1031 Exchange?

What a great question!  There is no absolute answer here.  Those of you who follow my blog entries know my answer that is coming.  My answer, of course, is that it depends.  It depends on the real estate investor's specific circumstances, on the investor's specific geographic market, and most importantly on their individual goals and objectives. 

Lending and Valuation Challenges; Falling Rents and Occupancy

Real estate market values are certainly at their lowest levels in years, and even decades, and real estate financing guidelines are not the easiest to work with in today's real estate environment.  Buyers that routinely used 85 percent (85%) financing ("leverage") just a few years ago are now generally forced to settle for around sixty (60%) financing ("leverage") in today's lending environment, and sometimes even lower, which of course translates into higher equity requirements. 

Investors that are forced to investment more equity into a purchase are obviously going to look for cheaper prices.  The value of the property is not as attractive as it once was when money from easier to obtain via lenders.  Additionally, with fewer investors able to obtain financing, there will be much less competitive bidding on most properties.

Finally, rents have been stagnant or falling. Vacancies are rising in many commercial buildings as tenants go out of business or reduce their square footage requirements, making the building less profitable for a potential buyer. All these factors have combined to drive prices down across the board.

This Will Be The Most Important Buying Opportunity of a Lifetime

However, believe it or not, I believe this is the most important time to sell, structure a 1031 Exchange, and buy in order to reposition your investment property portfolio for the next few years.  

I recently read another blog post that said

this market presents a once-in-a-generation investment opportunity"  

I could not have said it any better.  My apologies to the original author.  I could not find the related blog to link back to.  Please let me know if you recognize it so that I can do so. 

But, I think the quote is dead on.  We will only see buying opportunities like this once in our lifetime, and now is the time to take advantage of them.  And, we have already seen the beginning of foreign investment coming into the United States, and I would expect this momentum to continue to grow.  They recognize an incredible value. 

Strong Equity Position Puts You in the Driver's Seat

Investors that have been conservative all along and now have strong equity positions in their commercial properties should be able to capitalize on this strategy by selling some of their buildings and buying bigger, more profitable properties, or numerous smaller more profitable properties. They may get slightly less for their buildings than they would have realized a year or two ago but it is likely that they will pay less for their new buildings, too.

Defer Taxes with a 1031 Exchange

Generally, these repositioning strategies can be structured as 1031 Exchanges so that the investors' capital gain taxes are deferred into the replacement properties acquired.  The restructuring allows the investor to also reduce their property tax cost basis because they are buying at extremely lost cost basis with today's valuations. 

I realize that capital gain tax rates are the lowest they have been in a number of years, and that they are most likely going up, but any tax paid is a bad thing in my finance book.  I want to keep all of my money working for me to continue to build my financial picture.  I don't want to pay anything to the government that I do not have to pay.

Business Owners May Want to Consider a Sale-Leaseback

Business owners often buy their commercial buildings in which they operate their businesses.  This gives them much better control over their costs, debt, and operations, but it also means they have tied up quite a bit of capital.

They may want to consider selling their commercial property and then leasing it back from the buyer under a sale-leaseback arrangement.  This can provide them with the capital they need to grow their business.  You don't lose much in the way of control and can free up quite a bit of trapped capital. 

However, a poorly structured sale-leaseback can cause you serious tax problems, so always consult with a legal and tax advisor that has some experience with these.  Selling a business right now may not be the greatest timing, but those that want to sell and not pay all of their taxes immediately may want to consider a Deferred Sales Trust.

Consult With Advisors

There are lots of moving targets in this market, and they can vary considerably from geographic market to geographic market.  So, meet with your Realtor to get an idea of what might be possible.  Then meet with your tax advisors and legal advisors to make sure that you are not creating any other problems.  And, then take advantage of this market.