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1031 Exchanges in a hot real estate market

What a great time to sell real estate!  The supply of residential properties in the Richmond area is so low that we are seeing competing offers, escalation clauses in contracts and homes selling within hours of hitting the market.  The supply of properties in some sectors of the commercial market is equally low.  Industrial property with yard space is particularly scarce.  It is a great situation for sellers who want to cash out.  However, the flip side of a hot market is that sellers who want to re-invest using a 1031 exchange cannot find reasonably priced replacement property.  If you sell high you may also have to buy high.  For a seller who is moving from an under-performing property to one with better income or investment potential the trade-off may be fair.  But what if you just want to take advantage of the hot market, maximize the value of your property and then re-invest in another property in order to defer your capital gain under a 1031 exchange?  Of course, 1031 exchanges are not limited to the same market or same type of property.  You can sell a warehouse in Richmond and buy a beach rental in the Outer Banks of North Carolina.  There may be better re-investment opportunities in other communities or other states.  Another option is to invest in a tenant in common (TIC) property or a Delaware Statutory Trust (DST).  In any case, sellers should have a good idea what they want to do well in advance of closing on the property they are selling.  Plan ahead.  Investigate your options even before listing your property for sale.  The 45-day window for identifying replacement property closes quickly, and once it is closed it cannot be re-opened.

Andrew Lingle