The latest from Asset Exchange Company’s June Newsletter:
Clients have recently asked us what we are seeing in the market?  Is it still slow?  Have things been improving?  What  investors are exchanging? Some of our recent observations might be helpful:

1. REO’s – An overwhelming number of our clients are buying REO’s.  In fact, last month over 75% of our the replacement properties acquired by our 1031 Exchange clients were purchased directly from banks.  Obviously our clients are finding value within the REO market.

2. Paying Taxes – Although we hate to see it, many investors are choosing to pay taxes (say it aint so!).  With the expectation that the federal capital gains tax rate, currently at 15%, will rise soon (possibly to 20% or higher), many investors are simply choosing to ‘bite the bullet’ and pay taxes.  Often this can be a good strategy if the investor wants to be completely free of owning real estate.  It is our belief however that if an investor plans to maintain real estate as part of their investment portfolio, cashing out and paying taxes may not be the wisest decision.  Tax free options, such as refinancing if cash is needed, may be a better strategy.  The tax breaks of owning real estate are substantial and to ‘bite the bullet’ and pay taxes, may be unwise and often unnecessary.

3. Frozen Market -After conversations with hundreds of commercial brokers, it appears as if the commercial market may be ‘frozen’ – or at least infuriatingly slow.  We’ve seen a handful of larger commercial properties trade, but we agree with our commercial broker friends…it’s slow.

4. No Appreciation Exchanges – With sellers being forced to lower prices, the end result when a buyer is found may be a lack of any appreciation on the property.  However, due to depreciation – the investor may still have a significant tax bill (remember the depreciation recapture tax is 25%).  In the last month alone we’ve seen a handful of exchanges accomplished for the sole fact of avoiding the depreciation recapture tax.

5. Acquisition Mode – We’ve fielded many calls in the last few weeks from investors who are ‘gearing up’ to invest. Faith in the US economy is returning and investors are confident that deals exist in the real estate market.  Many investors are in acquisition mode and have reached out to us to help them make prudent decisions on how best to mitigate tax liabilities over the long term.  At this point investor interest seems to be stronger in the residential income side of the market.

If you’d like to discuss anything mentioned in this month’s newsletter, or if you have general 1031 Exchange questions, please don’t hesitate to contact me at 877-471-1031.

It’s my goal to be your ‘go to guy’ for all 1031 Exchange issues.
Regards,

Leonard Spoto, Principal