The Changing Marketplace: To Exchange or Not to Exchange

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Although the commercial marketplace has not experienced the drastic declines that we have seen in the residential market, there are conditions affecting commercial real estate that Accommodator Finance Company gives a good hard look at to determine what is on the horizon.

Although the commercial marketplace has not experienced the drastic declines that we have seen in the residential market, there are conditions affecting commercial real estate that give reason for Accommodator Finance Company (http://accommodator.net ) to take a good hard look at what is on the horizon. "We all know that the real estate market is cyclical, and that there are opportunities in every market. Many investors believe that due to current market conditions, this is the best time to acquire property through the use of a 1031 tax deferred exchange and defer their capital gains tax until sometime in the future," states Kevin Levine, Vice President of Accommodator Finance Company.

Many real estate investors have owned their investment property for many years. With the current decline in some property values, real estate investors assume that it would be more beneficial for them to "cash out" of their current property rather than facilitate a 1031 tax deferred exchange as they have in the past. This assumption may or MAY NOT be correct. What real estate investors fail to consider, particularly if they have acquired the property as replacement property in an earlier exchange, is that their basis in the property could be very low and therefore there may be significant gain even if there is no equity...This is why it is essential for an investor to seek the advice of a tax advisor who specializes in 1031 tax deferred exchanges so that all options can be considered and explored.

Furthermore, due to the current political uncertainty of which party will control Congress (both House and Senate) and The Executive Branch of our government in 2009, real estate investors are considering adjusting their tax strategy. See the March 12, 2008 edition of The Wall Street Journal article by Arden Dale where he points out the possibility of an increase in the Capital Gains Tax depending upon who is placed into office.

"An increase in capital gains tax has been a major point of speculation amongst our clients and industry professionals alike. Should investors pay the current 15% tax rate now or wait until later and take a risk that the rates will jump to 20% or 25%? Either way, facilitating a tax deferred exchange still presents the most economical option for many investors," asserts Levine.

Remember, the news is not all bad. There are still many markets that are experiencing growth and increased values. The REO market is slowly affecting the commercial real estate sector. While this market condition is adverse to some, it can provide great investment opportunities for others.

As always, it is important for the real estate investor to keep apprised of all current market conditions and how they affect their portfolio. Additionally, it is imperative that the real estate investor maintain a team of professionals to assist them with their investments. This "team" should include a CPA, Tax Attorney, Real Estate Broker, Lender, Escrow Professional and Qualified Intermediary.

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Shoham Nicolet
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