www.marejournal.com
6C — September 25 - October 15, 2015 — Fall Preview — M id A tlantic
Real Estate Journal
1031 E xchange
By Brian Hosey, Marcus & Millichap The basics of the 1031 Exchange
M
utilizing the 1031 provision in the Internal Revenue Code, otherwise known as a Starker exchange, to meet the dual objectives of “trading up” to larger or higher quality prop- erties, while at the same time deferring capital gains taxes. Some investors, especially ag- ing baby boomers, are trading into properties that are less management intensive. Knowing the Basics While there are three basic types of exchanges — simul- taneous, reverse and deferred — deferred exchanges account for 95 percent of these types of
efficiency. Leveraging the Market Owners of investment prop- erty struggle with the dilem- ma of how to take advantage of “built up” equity in their income-producing properties, increasing their return on equity, while deferring paying capital gains taxes. The cur- rent market environment has encouraged private investors to upgrade or reposition their real estate holdings. Benefits of a 1031 Exchange With proper guidance from a tax professional or attorney, well informed investors are
transactions. When selling an investment property, the code allows a seller 45 days from the close of escrow of the relin- quished property (“down leg”) to identify up to three replace- ment properties (“up leg”), and an additional 135 days to close escrow on at least one of the identified properties. The seller must contract with a neutral third party, known as a quali- fied intermediary or accommo- dator, to hold the funds from the sale of the relinquished property and to purchase the replacement property for the seller’s benefit. Completing
this process allows sellers of real property, held for invest- ment purposes, to delay or de- fer the payment of capital gains and recapture the depreciation tax benefit. Deviating from the process described above may result in tax consequences or costly penalties. Making Informed Decisions While 1031 exchanges have gained increasing popularity, each investor should evaluate their own situation and objec- tives. The first step is to have a qualified real estate agent evaluate your property to de- termine market value and then discuss the tax alternatives with your tax advisor. In some instances, it may be worth tak- ing the cash and paying capital gains taxes. On the other hand, an exchange may be the key to unlocking built-up equity and providing the opportunity to expand a portfolio and create greater wealth. The biggest mistake would be not to know your alternatives. Brian Hosey is regional manager of Marcus andMil- lichap NJ. n NORTHERN NJ — The strength of New York City’s job market has given stability to the Northern New Jersey retail market as residents commute to higher-wage jobs in the city yet make purchases at local shopping centers. Additionally, some companies are moving op- erations to the west side of the Hudson River in search of high- quality office space at rental rates that are discounted from those in Manhattan. Job op- portunities on both sides of the river are driving up consumer confidence and boosting retail spending. As a result, dark in- line space is beginning to lure smaller tenants, a welcome trend for owners who have dealt with higher vacancy for the past few years. Several national big- box grocery retailers and restau- rants are expanding their pres- ence in the six-county region. Rising demand is encouraging retail development in the area. Most projects are build-to-suit or heavily pre-leased by the time construction begins. De- velopments that are underway are reported to be around 95% leased. Compressing vacancy is fostering asking rent growth, increasing property incomes throughout the area. n Marcus &Millichap NNJ market report
arcus & Millichap , one of the nation’s largest real estate
investment b r o k e r a g e firms, is one of the indus- try’s leaders in the area of 1031 ex- changes. Our l o n g - t e r m relationships
Brian Hosey
with owners and investors of every major property type in markets nationwide allow us to match properties and ex- change buyers with speed and
Made with FlippingBook flipbook maker