Billions of dollars worth of commercial mortgages are set to mature in 2025, leading to an increase in the number of distressed properties. According to Julie Baird, president of First American Exchange Company, this presents a unique opportunity for investors through the use of a 1031 exchange.
In an interview with Connect CRE, Baird explains why the 1031 exchange process is a viable tool for dealing with distressed properties. She notes that sellers may face significant tax burdens and depreciation recapture if they dispose of their property without utilizing a 1031 exchange.
For example, if someone purchased a property for $70 million and refinanced it at $100 million but it ends up being worth only $80 million (with all debt), they would still be faced with taxable gains and depreciation recapture on what would otherwise be considered as total loss. A 1031 exchange allows them to defer these taxes by reinvesting their proceeds into another like-kind property.
Baird also points out that buyers using the 1031 exchange process may have more favorable purchase prices due to lower interest rates and less reliance on debt financing upfront. This can lead to long-term benefits as well since lower interest rates can result in increased property values over time.
When asked about which types of distressed properties lend themselves well to a successful build-to-suit or traditional like-kind exchanges , Baird mentions multifamily buildings as one option due low construction starts resulting from decreased supply when current units are leased up. Additionally, she suggests that office spaces could present opportunities for investors looking at converting them into multifamily units once prices start increasing again after recovering from remote work effects and high vacancy rates caused by COVID-19 pandemic disruptions .
Finally , when discussing past market activity trends related specifically towards effectiveness between previous real estate cycles compared against today’s conditions where we see challenges across most sectors within our industry globally including here domestically too – Ms.Bairds believes that 1031 exchange volume remains strong and a vital tool for liquidity in the market, even when market conditions present challenges to the real estate industry as a whole.
In conclusion, Baird advises investors to work closely with their team of professionals and consider utilizing tax tools like 1031 exchanges in order to support their business or investment goals. By understanding how these processes work and being proactive about identifying opportunities, investors can navigate through challenging markets more effectively.
