There have been numerous articles published in various media outlets over the past few calendar quarters discussing the fact that 1031 Exchange transaction volume is way up. We have certainly experienced the same thing in our 1031 Exchange operation - 1031 Exchange volume has exploded over the last 12 months - and the trend line (pipeline) continues to look very strong indeed.
Reverse 1031 Exchange Volume Significantly Up
An underlying trend that we noticed as we analyzed our 1031 Exchange transaction detail was that Reverse 1031 Exchange activity had not only increased as well, but had increased significantly more than regular Forward 1031 Exchanges on a percentage basis.
This substantial increase in Reverse 1031 Exchange activity is certainly not surprising when one looks at the underlying real estate market fundamentals today. The real estate market velocity has been crazy. Investors are experiencing multiple offers and bidding situations in many markets. This makes a regular Forward 1031 Exchange stressful.
Forward 1031 Exchange Market Risks
Forward 1031 Exchanges mean that an investor sells his or her relinquished property first and then they have 45 calendar days to identify their replacement property and 180 calendar days, includng the initial 45 days, to acquire and close on the replacement property.
The challenge is that once the sale of the relinquished property closes the taxable gains have been triggered. The investor must identify and acquire/close on the replacement property in order to defer the payment of their capital gain taxes. If they can't identify and acquire/close on the replacement property then the 1031 Exchange fails and they must recognize their taxable gains. (Read Year-End Tax Planning When a 1031 Exchange Fails).
Investors Minimize Market Risk With Reverse Exchange
This explains why the Reverse 1031 Exchange transaction volume has risen as significantly as it has over the past 12 months. The Reverse Exchange gives an investor the ability to take all the time they want to locate and acquire suitable replacement property, including doing their due diligence, before they sell their relinquished property.
Investors can eliminate the risk involved in a Forward 1031 Exchange (i.e. the 45 calendar day identification period) because they actually acquire and close on their replacement property first so there is no risk that they will not be able to located, identify and acquire the replacement proeprty within the deadlines.