According to Julie Baird, president of First American Exchange Company, the year 2025 will see a significant increase in distressed properties as billions of dollars in commercial mortgages mature. In light of this situation, Baird believes that the 1031 exchange process can offer unique opportunities for dealing with these assets.
When asked why the 1031 exchange is a viable tool for handling distressed properties, Baird explains that sellers are likely to face taxable gains and depreciation recapture if they sell their property. For example, if a property was purchased for $70 million but is now only worth $80 million due to refinancing and debt obligations, the seller would still be faced with a taxable gain of $10 million plus depreciation capture. However, by utilizing a 1031 exchange process , sellers can defer these tax burdens on what would otherwise be considered as total loss.
In addition to providing relief for sellers facing potential losses on their distressed properties , buyers using the 1031 exchange may also benefit from securing favorable purchase prices at present due to lower interest rates. This could potentially lead them towards greater long-term gains when interest rates decrease in future years.
Baird notes that multifamily buildings are one type of asset particularly suited for this type of transaction because construction starts have decreased which means inventory will eventually decrease leading prices higher once again . Similarly office spaces may also present opportunities since many companies have shifted towards remote work resulting in high vacancy rates . As such there may be an influx or “distressed” debt within this market come time around year end .
Furthermore , investors who acquire troubled assets through Build-to-Suit exchanges (which allow owners use proceeds from sale relinquished property make improvements replacement) might find themselves benefiting greatly over time thanks lowering interest structural supply challenges keeping construction starts low .
Finally it should not go unnoticed how past activity has shown us just how effective like-kind exchanges remain even during challenging times real estate markets overall . As such Baird believes that real estate investors should always be on the lookout for opportunities to support their business or investment goals and knowing how utilize existing tax tools like 1031 exchange can provide options in otherwise limited markets.
