1031 tax-deferred exchanges will continue an upward trend in 2017 - by Brendan Greene

Brendan Greene, Greater Boston Exchange Co.

While it is nearly impossible to predict what impact the Trump administration will have on the real estate industry, we agree with many of the predictions and forecasts for a strong real estate market for 2017 with continued, albeit slower, growth. The real estate market in the Greater Boston area and throughout New England over the past few years has led to an increase in 1031 tax-deferred exchanges in our area by both domestic and foreign investors. We believe that trend will continue in 2017.

Internal Revenue Code (IRC) Section 1031 allows a property owner, who holds property for “the productive use in a trade or business or for investment”, to defer paying any capital gains taxes if the property owner sells such property, identifies “like kind” property within forty-five days of the sale, and acquires other “like kind” property within one hundred eighty days of the sale.

The increase in property values throughout New England and specifically in Massachusetts has given investors large equities in their properties subjecting them to higher capital gains taxes on the sale of such properties.  Consequently, more investors, both U.S. and foreign, are using 1031 tax-deferred exchanges in order to defer paying capital gains taxes.  Investors enter into exchanges for a number of different reasons. They may want to diversify (sell one large property and buy multiple smaller properties), consolidate (sell multiple smaller properties for one large property) or purchase other investment property that has a better income stream, is easier to manage or has more upside than the property they currently own.

CoreLogic, a leading provider of consumer, financial and property information and analysis, predicts the following for the national housing industry in 2017:  Moderate increase in interest rates; vacancy rates remain low for rental properties and appreciation will continue but at a slower pace than in 2016.

Locally, there is room for more optimism. Realtor.com has Boston listed as No. 3 for the hottest real estate market in 2017. “The top 10 markets all benefit from strong growth dynamics: population, jobs and households,” realtor.com chief economist Jonathan Smoke said. “They all have low unemployment that’s heading lower, which buoys consumer confidence.” The report says the top 10 housing markets have a few common themes: low unemployment, large populations of millennials and baby boomers.

Most economists predict an increase in incomes. With rents expected to slowly continue rising, and with interest rates also rising, but remaining relatively low, the purchase of rental properties in Massachusetts and New England  continues to be an attractive investment.  As rental rates stabilize and incomes rise, these factors will lead to an increase in rentals. The resulting increases in the rental real estate market will then further the upward trend in 1031 tax-deferred exchanges.

With the very active and rising real estate market in the area, we see many investors looking to act quickly on exchanges and as a result we have seen a significant increase in reverse and improvement exchanges where investors have acquired replacement property before selling their existing investment properties. This allows investors much greater flexibility to accomplish an exchange and if properly structured, will have a successful result in deferring capital gains taxes.

Brendan Greene is owner, operator and attorney with Greater Boston Exchange Company, LLC (a subsidiary of McCue, Lee & Greene, LLP), Boston.