The pandemic and the emergence of a late-cycle commercial real estate market have been challenging for many real estate sectors over the past few years. While certain sectors like multifamily housing and industrial facilities continue to perform well, others, including commercial office space, retail strip centers and shuttered shopping malls, have not necessarily fared as well.

This downturn has caused many property owners to question when, if ever, their real estate will recover to full occupancy. While few can predict that answer, an option that allows investors who own distressed property to take actionable steps to upgrade their investments is by using a 1031 exchange to sell property and reinvest in like-kind replacement property.

A Market for Buyers and Sellers

As a refresher, a 1031 exchange is a tax-deferral strategy identified in Internal Revenue Code Section 1031 that allows investment property owners to defer capital gains and depreciation recapture tax when selling property and reinvesting in other commercial property that meets “like-kind” replacement property requirements of an exchange. 

We have recently seen increased interest among sellers and buyers of distressed commercial real estate including office and retail centers to use a 1031 exchange as a means of conducting real estate transactions they believe could be beneficial at this time. 

For example, many sellers of underperforming properties may be motivated to exit the market while the future of their properties remains uncertain. The 1031 exchange allows them to defer taxes on any gains in their property and reinvest in other commercial properties that may have potential to offer enhanced returns and a more attractive income stream for investors.¹

The like-kind property definition of a 1031 exchange is quite broad and would allow a seller of a retail center to exchange for raw land, an apartment complex, or even a boutique hotel. And in some instances, a seller could exchange for units in a Delaware Statutory Trust and potentially own an interest in a diversified portfolio of institutional-quality properties.

Many potential buyers of distressed property see an opportunity to capture assets at below long-term market valuations, potentially make improvements or upgrades, or even reposition the property while also deferring gains on their relinquished investment property by using a 1031 exchange. Often these distressed properties are located in well-trafficked areas with amenities and infrastructure that would make renovations a welcome relief for potential tenants and customers.

In both cases, the 1031 exchange can help facilitate commercial real estate transactions to help meet the needs of buyers and sellers, even at a time when the economy remains unsettled and the market is in a late-cycle stage.

If you’re considering a 1031 exchange, our team at Fortitude Investment Group is here to guide you through every step of the process. You can get started by contacting our team to schedule a no-cost consultation. 

1. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.

Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.

This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.

There are material risks associated with investing in private placements, DST properties and real estate securities including illiquidity, general market conditions, interest rate risks, financing risks, potentially adverse tax consequences, general economic risks, development risks, and potential loss of the entire investment principal.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group, LLC is independent of CIS, CAM, and CIA.