The timing of a tax-deferred exchange is a critical issue in real estate investment. Bob Nelson, real estate investment broker, with Pacwest Real Estates Investments, and Marcia Edwards, residential broker with Windermere Real Estate, examine the current market in commercial investments and look at tax-deferred exchanges.
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What Is a Tax-Deferred Exchange?
With a tax-deferred exchange, individuals can sell a qualified property and buy a replacement property without having to pay the capital gains tax or depreciation recapture to the federal or to the state government. Of course this opportunity is contingent upon abiding by the applicable set of rules. But this is a great opportunity to use all of your equity to buy the next property.
This allows you to put more cash into your next purchase, providing a better return immediately. Deferring provides value at many levels
It’s All in the Timing
This opportunity is time sensitive, however, and that can be a particular issue in this hot real estate market. If the buyer hasn’t identified an opportunity before they sell, they could run out of time to take advantage of the tax-deferred exchange. This requires some planning up front.
EXPERT TIP
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
Sellers on an exchange looking to become a buyer will suggest that they want to buy, or at least have under contract their replacement property, before they offer their ‘down leg,’ or property for sale. This is nice in theory, but if I am the listing broker on the property that they’re after, I’m going to ask whether it’s an exchange. And if it is, I consider that offer to be frivolous in nature, because they don’t have the horsepower to buy the property right now. So I don’t necessarily take my property off the market at that point, until they have a proven capacity to close.
If you’re a buyer thinking in terms of a tax-deferred exchange, you should contact a broker with exchange experience and also one who is experienced with the property type that you’re after. Make sure that you do that about two months in advance of the time that you sell your down-leg property.
This discussion about the current commercial real estate market and tax-deferred exchanges is from Bob Nelson and Marcia Edwards “Real Estate Today ” Eugene, Oregon, radio show, which airs at 5:30 daily on KPNW.