The secret to a successful 1031 Exchange in a HOT real estate market.
By Cindy Pratte-Smith Realtor®, M.B.A.
Low inventory, rising prices, low days on market, and often frenetic multiple offer competition —all the hallmarks of a sellers market have been, maybe in hindsight, a not-so-surprising effect of the Covid-19 crisis in northern Nevada.
There has been an unprecedented influx of out-of-state property buyers—physically untethered from their urban office jobs—choosing to move to the Lake Tahoe area away from dense metropolitan cities, higher taxes, relentless wildfires and other lifestyle considerations. These usually cash-flush buyers are choosing to invest in locales with less people, less traffic, larger homes boasting dedicated office, home schooling and gym spaces. These desirable properties are often situated on comparatively larger lot sizes with easy access to pandemic-alleviating outdoor recreation offering mother nature’s soothing distractions, and thus a sense of normalcy and more precious room to breathe.
Because of this, my 1031 investor clients have had a challenging time competing with this frenzied sales environment as the most desirable properties are getting same-day, over-ask offers, often all cash, and quick-close to increase the offer’s attractiveness. In this market a typical sell first, clock’s ticking 1031 Exchange can be a liability, and can put my buyers at a disadvantage against other more nimble buyers. So, in today’s hot market, the secret to utilizing the 1031 tax advantage is to prepare yourself to reverse the process.
With a Reverse 1031 you can identify, purchase and close on the perfect replacement property first, and then from that closing date you have 180 days (6 months) to close the sale on your exchange property. This option takes a tremendous amount of stress off the process, as with a typical, or Deferred 1031, you only have 45 days to select up to three replacement properties, and 180 days (concurrent with the first 45 days) within which to close on one of them. The sensation of the clock ticking can often occur while you are in escrow on your exchange property. As anyone who has ever been involved with real estate transactions knows anything can happen at almost any moment to unravel a deal. If either the new purchase or existing escrow falls apart, you may then find yourself out of time to make your dream acquisition, and/or out of options to benefit from a valuable capital gains tax deferral.
There are some caveats to a Reverse 1031 worth mentioning, the primary of which is the fact of financing the replacement purchase first. The investor must be able to buy the new property without first selling the existing property— either, and ideally, with all cash, or less ideally with a loan. There are lenders that are willing to work with Reverse 1031 investors, but investors should do their homework and always consult with their legal, financial and tax advisors before deciding how to proceed. Additionally, a 1031 Exchange Accommodator, a qualified intermediary, must be employed to facilitate the process, and be set up to temporarily hold the title to either the existing property, or the new property during the exchange timeline. This will typically cost a few thousand dollars but, in the case of a heated real estate market, is money well spent to ensure you are successful in your exchange.
If you would like to discuss 1031 Nevada real estate investment opportunities currently available please call me at (775) 691-9442 to set up a consultation.
