2023 is underway! Below are key trends, issues and points regarding 1031 Exchanges and Commercial Real Estate.
1031 Exchange Trends and Market Update 2023
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.
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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.
- Choose your 1031 Qualified Intermediary (QI)
- Consult with your tax professionals
- Include Cooperation Clause language in your purchase and sale agreement
- QI prepares your exchange documents
- Start searching for Replacement Property
- Sign all documents QI prepares
- Sell your Relinquished Property
- Identify your Replacement Property
- Enter into contract on Replacement Property
- Contact QI once Replacement Property escrow is opened
- Close on Replacement Property
- QI transfers funds to complete your purchase
- Your exchange is complete
If you would like to learn more about 1031 Exchanges and our sister company, IPX1031, please contact Jeff Leichtnam at jeffrey.leichtnam@ctt.com or 716.200.5872
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