Real estate update: 1031 exchanges in early 2025
The real estate market is always changing, and early in the calendar year 2025, we are seeing a unique environment develop before our eyes. Depending on the geography where your feet take you, your toes will plant themselves in trends that require highly skilled and trained eyes to identify potential opportunities that exist below the surface.
Some real estate investors feel intense pressure to sell their properties in response to various factors (both personal and environmental). However, they hesitate to take the obvious exit from these positions (even if such a transaction would be the best course of action) because they do not want to pay the resulting taxes from the sale and do not believe there are attractive opportunities available for like-kind exchanges to defer the tax gain.
Opportunities may not be as visible as they once were, but they are certainly still available. Whether entering into a Section 1031 Like-Kind Exchange or buying an investment real estate property as a first step into the market, one must create a prudent and methodical plan to ensure the endeavor has a high likelihood of success. The following is a list of considerations we use to guide a client in better understanding what kind of participation would most benefit them within the real estate investment market.
The factors/considerations below are addressed to best direct the investor’s search for their ideal investment:
- Amount: There are minimum investment requirements for any particular structure. This question simply helps identify the types of investment choices we can explore.
- Time Horizon: Real estate, by nature, is an illiquid asset. There may be exceptions, but assuming invested capital is locked up, how long can you tolerate having these assets be unavailable?
- Income vs Growth: How do you prioritize income versus growth? This often involves an assessment of risk, but yield-seeking can also be complex. Rather than viewing this as purely a risk-on or risk-off question, the focus is more on your interest or need for income versus capital gain.
- Tax vs Return: Is the goal to mitigate tax liability or maximize return? For example, a municipal bond pays less than a corporate bond but is taxed less (or not at all). For on-market, off-market, real estate, and other private equity investments, this will be an important factor to keep in mind.
- Estate Intentions: Since investments in these spaces can be illiquid, there may not be options to redeem, put, or sell upon inheritance. Beneficiaries may need to be considered when planning the exit strategies for certain investments. You may be able to manage these investments differently from how your beneficiaries can.
When considering a 1031 transaction, the amount is already determined, as the rule requires replacing the entire sales proceeds, including the replacement of debt relieved from the previously sold property. However, after that, the factors above can be reviewed to determine the appropriate direction moving forward.
Next, we examine particular real estate ventures with expected return dynamics embedded in their design. While the options extend beyond the following, a like-kind exchange can transition into the following: land (with the intention for development – only the land itself counts as replacement); ground lease (owning land on which a building sits and collecting rent from the building owner); covered land (i.e., purchasing an existing structure with intentions of repurposing it from its original usage – e.g., turning an extended-stay hotel into apartments); value add (intention to buy, rehabilitate the property, and sell for outsized equity return); income-producing (quality property intended to provide reliable income immediately upon purchase); and more. There will also be circumstances where some opportunities combine several investment focuses (i.e., value add and income, etc.). There are costs and benefits to each of these options, and it is important to weigh them before proceeding.
Geography, as mentioned above, is also an important consideration. Whether the driving force of concern stems from political influence (pro-landlord/tenant, pro-business, etc.), local tax rates, demographic trends, relative proximity (to where the investor resides), asset niche (multifamily, office, industrial, retail, etc.), or otherwise, the property’s location will always be a major factor in an investor’s decision-making process.
There are red flags to keep in mind when pursuing replacement property:
- Identification Window:
- Avoid warehousing: Especially in today’s confusing real estate market, where it appears difficult to find suitable investments, some investors may be tempted to seek temporary situations where they can “park” their sales proceeds with a property, having a predetermined date and price of liquidation, while they pursue a longer-term investment solution. This is sometimes referred to as “warehousing” and is prohibited by the IRS, as it is seen merely as a trick to circumvent the strict timing requirements laid out in the Section 1031 tax code.
- 45 days from closing on your original sale is the deadline by which the exchanging party must identify the replacement property or properties. The notification must be submitted to the qualified intermediary (or signed and dated prior to the 45-day expiration date with the party from whom you intend to purchase the replacement property). That purchase agreement can then be shared with the qualified intermediary after the 45-day window expires, assuming the date on the purchase agreement is in compliance.
- Abide by the rule of “100% AND 3” or 200%:
- To comply with Section 1031, the replacement property purchase must be equal to or greater than 100% of the relinquished property's sale price (including any debt paid off). Any amount less than 100% is considered "boot" and is subject to taxation at the depreciation recapture rate and/or long-term capital gains rate.
- Concurrently, the replacement property purchase price generally cannot exceed 200% of the relinquished property's sale price. However, this 200% rule does not apply if three or fewer properties are being acquired.
- Closing Regulations:
- 180 days from the closing date of your original sale is the deadline by which the exchanging party must close on the purchase of the identified property or properties.
- The 95% Rule: The exchanging party can identify any number of replacement properties of any value but must close on at least 95% of the total identified value.
Financial planning around real estate investments and management brings many considerations into focus. Wealth Retention offers a specific approach tailored to real estate professionals called Real Estate Planning Strategies. Wealth Retention focuses primarily on three core principles: Tax Mitigation; Protection (Insurable and Non-Insurable); and Exit Planning (Estate, Succession, and Outright Sale). Real Estate Planning Strategies incorporates these three core principles while adding two additional service lines to provide a more holistic suite of offerings for its clients: Leverage and Liquidity, and Investment Valuation/Evaluation. Evaluating a follow-up transaction after selling an investment property (such as pursuing a 1031 transaction) can be daunting, and the considerations mentioned are just some of the reasons why it can feel overwhelming. Having a wealth advisor who is both personally and professionally experienced and specialized in real estate can turn this daunting task into a tremendous opportunity.
Schedule a conversation today to see how the Real Estate Planning Strategies process can support your Wealth Retention goals.
Wealth Retention is a business name used for marketing purposes. All advisory services are offered through Savvy Advisors, Inc. (“Savvy”). Savvy is an investment advisor firm registered with the Securities and Exchange Commission (“SEC”). Wealth Retention and Savvy are not under common ownership or control. Savvy Advisors is not a real estate broker and does not provide real estate services. Material prepared herein has been created for informational purposes only.
Meet
David Gottlieb
Hi there 👋🏼 I'm David Gottlieb, with over 20 years of financial expertise covering accounting (tax, financial reporting, and attestation), alternative asset operations, and wealth advisory for a diverse set of clients. My focus now centers on in-depth behavioral and financial planning using the unique Wealth RETENTION Process, primarily focusing on tax efficiency and estate planning.
All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”). Savvy Wealth Inc. (“Savvy Wealth”) is a technology company and the parent company of Savvy Advisors. Savvy Wealth and Savvy Advisors are often collectively referred to as “Savvy”.
Real estate update: 1031 exchanges in early 2025
The real estate market is always changing, and early in the calendar year 2025, we are seeing a unique environment develop before our eyes. Depending on the geography where your feet take you, your toes will plant themselves in trends that require highly skilled and trained eyes to identify potential opportunities that exist below the surface.
Some real estate investors feel intense pressure to sell their properties in response to various factors (both personal and environmental). However, they hesitate to take the obvious exit from these positions (even if such a transaction would be the best course of action) because they do not want to pay the resulting taxes from the sale and do not believe there are attractive opportunities available for like-kind exchanges to defer the tax gain.
Opportunities may not be as visible as they once were, but they are certainly still available. Whether entering into a Section 1031 Like-Kind Exchange or buying an investment real estate property as a first step into the market, one must create a prudent and methodical plan to ensure the endeavor has a high likelihood of success. The following is a list of considerations we use to guide a client in better understanding what kind of participation would most benefit them within the real estate investment market.
The factors/considerations below are addressed to best direct the investor’s search for their ideal investment:
- Amount: There are minimum investment requirements for any particular structure. This question simply helps identify the types of investment choices we can explore.
- Time Horizon: Real estate, by nature, is an illiquid asset. There may be exceptions, but assuming invested capital is locked up, how long can you tolerate having these assets be unavailable?
- Income vs Growth: How do you prioritize income versus growth? This often involves an assessment of risk, but yield-seeking can also be complex. Rather than viewing this as purely a risk-on or risk-off question, the focus is more on your interest or need for income versus capital gain.
- Tax vs Return: Is the goal to mitigate tax liability or maximize return? For example, a municipal bond pays less than a corporate bond but is taxed less (or not at all). For on-market, off-market, real estate, and other private equity investments, this will be an important factor to keep in mind.
- Estate Intentions: Since investments in these spaces can be illiquid, there may not be options to redeem, put, or sell upon inheritance. Beneficiaries may need to be considered when planning the exit strategies for certain investments. You may be able to manage these investments differently from how your beneficiaries can.
When considering a 1031 transaction, the amount is already determined, as the rule requires replacing the entire sales proceeds, including the replacement of debt relieved from the previously sold property. However, after that, the factors above can be reviewed to determine the appropriate direction moving forward.
Next, we examine particular real estate ventures with expected return dynamics embedded in their design. While the options extend beyond the following, a like-kind exchange can transition into the following: land (with the intention for development – only the land itself counts as replacement); ground lease (owning land on which a building sits and collecting rent from the building owner); covered land (i.e., purchasing an existing structure with intentions of repurposing it from its original usage – e.g., turning an extended-stay hotel into apartments); value add (intention to buy, rehabilitate the property, and sell for outsized equity return); income-producing (quality property intended to provide reliable income immediately upon purchase); and more. There will also be circumstances where some opportunities combine several investment focuses (i.e., value add and income, etc.). There are costs and benefits to each of these options, and it is important to weigh them before proceeding.
Geography, as mentioned above, is also an important consideration. Whether the driving force of concern stems from political influence (pro-landlord/tenant, pro-business, etc.), local tax rates, demographic trends, relative proximity (to where the investor resides), asset niche (multifamily, office, industrial, retail, etc.), or otherwise, the property’s location will always be a major factor in an investor’s decision-making process.
There are red flags to keep in mind when pursuing replacement property:
- Identification Window:
- Avoid warehousing: Especially in today’s confusing real estate market, where it appears difficult to find suitable investments, some investors may be tempted to seek temporary situations where they can “park” their sales proceeds with a property, having a predetermined date and price of liquidation, while they pursue a longer-term investment solution. This is sometimes referred to as “warehousing” and is prohibited by the IRS, as it is seen merely as a trick to circumvent the strict timing requirements laid out in the Section 1031 tax code.
- 45 days from closing on your original sale is the deadline by which the exchanging party must identify the replacement property or properties. The notification must be submitted to the qualified intermediary (or signed and dated prior to the 45-day expiration date with the party from whom you intend to purchase the replacement property). That purchase agreement can then be shared with the qualified intermediary after the 45-day window expires, assuming the date on the purchase agreement is in compliance.
- Abide by the rule of “100% AND 3” or 200%:
- To comply with Section 1031, the replacement property purchase must be equal to or greater than 100% of the relinquished property's sale price (including any debt paid off). Any amount less than 100% is considered "boot" and is subject to taxation at the depreciation recapture rate and/or long-term capital gains rate.
- Concurrently, the replacement property purchase price generally cannot exceed 200% of the relinquished property's sale price. However, this 200% rule does not apply if three or fewer properties are being acquired.
- Closing Regulations:
- 180 days from the closing date of your original sale is the deadline by which the exchanging party must close on the purchase of the identified property or properties.
- The 95% Rule: The exchanging party can identify any number of replacement properties of any value but must close on at least 95% of the total identified value.
Financial planning around real estate investments and management brings many considerations into focus. Wealth Retention offers a specific approach tailored to real estate professionals called Real Estate Planning Strategies. Wealth Retention focuses primarily on three core principles: Tax Mitigation; Protection (Insurable and Non-Insurable); and Exit Planning (Estate, Succession, and Outright Sale). Real Estate Planning Strategies incorporates these three core principles while adding two additional service lines to provide a more holistic suite of offerings for its clients: Leverage and Liquidity, and Investment Valuation/Evaluation. Evaluating a follow-up transaction after selling an investment property (such as pursuing a 1031 transaction) can be daunting, and the considerations mentioned are just some of the reasons why it can feel overwhelming. Having a wealth advisor who is both personally and professionally experienced and specialized in real estate can turn this daunting task into a tremendous opportunity.
Schedule a conversation today to see how the Real Estate Planning Strategies process can support your Wealth Retention goals.
Wealth Retention is a business name used for marketing purposes. All advisory services are offered through Savvy Advisors, Inc. (“Savvy”). Savvy is an investment advisor firm registered with the Securities and Exchange Commission (“SEC”). Wealth Retention and Savvy are not under common ownership or control. Savvy Advisors is not a real estate broker and does not provide real estate services. Material prepared herein has been created for informational purposes only.
Meet
David Gottlieb
Hi there 👋🏼 I'm David Gottlieb, with over 20 years of financial expertise covering accounting (tax, financial reporting, and attestation), alternative asset operations, and wealth advisory for a diverse set of clients. My focus now centers on in-depth behavioral and financial planning using the unique Wealth RETENTION Process, primarily focusing on tax efficiency and estate planning.
All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”). Savvy Wealth Inc. (“Savvy Wealth”) is a technology company and the parent company of Savvy Advisors. Savvy Wealth and Savvy Advisors are often collectively referred to as “Savvy”.
