12A — August 14 - 27, 2020 — Financial Digest — Investment/Multifamily Financing — M id A tlantic Real Estate Journal


I nvestment /M ultifamily F inancing

By Scott R. Saunders, Asset Preservation, Inc. 1031 Exchange Update - Summer 2020


as fee ownership, co-ownership, leasehold, easement, option to acquire real property as well as a license, permit, similar rights solely for the use, enjoyment or occupation of land and/or inher- ently permanent structure. The Proposed Treasury Regulations also clarified that local law definitions are not control- ling in determining whether property is real property and noted that every distinct asset must be analyzed separately to determine if the asset qualifies as real property. Also, in June 1031 exchange activity picked up considerably and this trend has continued into July and shows no signs of slowing down soon. The mix of 1031 exchange activity has changed from early spring until now. There are considerably more residential exchanges and transactions involving 1-4 units, land, vaca- tion homes held for investment, farms/ranches compared to commercial exchange transac- tions. There are several reasons for the uptick in residential exchange activity: Residential 1031 Exchange Market • The normal strong spring selling season was compressed and has been pushed back a couple of months into summer and likely fall. • Historically low-interest rates have made financing resi - dential transactions especially attractive for investors and homeowners. The interest rate for a 30-year mortgage dropped below 3% making the cost of financing very attractive and boosting cash flow for investors. • In late March and April, many sellers decided not to list their properties as no one wanted strangers tour- ing homes when there was so much uncertainty regarding COVID-19. The lack of new listings led to less inventory and more demand for exist- ing properties on the market. In fact, residential demand is so robust that many areas nationally are currently seeing bidding wars for residential properties. These bidding wars affect both home buyers and those seeking to purchase single-family rental (SFR) properties in 1031 exchanges. It is not uncommon for a prop- erty to go under contract the same day it hits the real es- tate market. This has created a challenging situation for continued on page 18A

he 1031 exchange mar- ket nationally has been like a roller coaster this

and/or shelter at home. The Treasury provided tax relief to some investors with Notice 2020-23 which extended many deadlines for investors affected by the COVID-19 pandemic in- cluding Section 1031 exchange time deadlines. Notice 2020-23 extended the 45-day identi- fication period deadline and 180-day exchange period for certain investors until July 15, 2020. (Note: There is no further extension in place currently.) After a large drop in ex- change transactions, where ac- tivity was about half of normal in late March and April, inMay

exchange transactional volume trended upward slightly as states slowly anticipated loos- ening restrictions and business- es reopened again. Addition- ally, real estate professionals and investors were beginning to adjust to virtual transac- tions. Video and interactive tours of properties replaced in-person inspections and walk- throughs. Closing offices and the title insurance industry innovated quickly in response to these new challenges. The marketplace adjusted to closing transactions virtually as new technologies and processes like

virtual notaries rapidly evolved to help sellers and buyers’ close transactions. On June 11, 2020, the Trea- sury released proposed regula- tions addressing what is consid- ered “real property” for Section 1031 exchange purposes after the enactment of Tax Cuts and Jobs Act (TCJA.) The proposed Treasury Regulations defined real property as land, “inher- ently permanent structures,” “structural components” of inherently permanent struc- tures, unsevered crops, water and space adjacent to land, interest in real property such

past spring and summer, plummeting down in April and roaring back up start- ing in June. I n l a t e Mar ch and A p r i l e x - change activ-

Scott R. Saunders

ity dropped off significantly as a result of the COVID-19 pandemic which forced the en- tire nation to work from home

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