Brendan Greene, Greater Boston Exchange Company, LLCThe flourishing real estate market in the Greater Boston area and throughout New England has led to an increase in 1031 tax-deferred exchanges in our area by both domestic and foreign investors over the past several years. We believe that trend will continue in 2016.
Internal Revenue Code (IRC) Section 1031 allows a property owner, who holds property for “the productive use in a trade or business or for investment”, to defer paying any capital gains taxes if the property owner sells such property, identifies “like kind” property within forty-five days of the sale, and acquires other “like kind” property within one hundred eighty days of the sale.
The increase in property values throughout Massachusetts has given investors large equities in their properties thus subjecting them to higher capital gains taxes on the sale of such properties. Consequently, more investors, both U.S. and foreign, are using 1031 tax-deferred exchanges in order to defer paying capital gains taxes. Investors enter into exchanges for a number of different reasons. They may want to diversify, consolidate or purchase other investment property that has a better income stream or more upside than the property they currently own.
CoreLogic, a leading provider of consumer, financial and property information and analysis, predicts that rental homes and apartments will continue to be in high demand in 2016. Vacancy rates continue to be at or around their lowest in 20 years and the high demand for rental houses and apartments is expected to continue to grow with the rise of new, young households. With rents predicted to continue rising and with interest rates remaining very low, the purchase of rental properties in the area becomes an attractive investment. The resulting increases in the real estate market have led to a surge in 1031 tax-deferred exchanges. We have seen a two-fold increase in business over the last two years.
There has been a significant increase in foreign investors in the Greater Boston area over the last several years. A recent survey conducted by the Association of Foreign Investors in Real Estate (AFIRE) ranked Boston as tied with Seattle for fifth place among the top U.S. cities for foreign real estate investors. According to AFIRE’s CEO, James Fetgatter, Boston is an inviting area due to a high barrier to entry, a vibrant urban core, the various reputable educational institutions, and even the European-like aesthetic that can create a certain level of comfort particularly for European investors to start and grow their businesses here and interest in the Boston real estate market is on the rise for foreign investors.
In addition to Boston’s rise in rank, the survey also showed that 64% of respondents say they expect to have modest or major increases in their involvement in U.S. real estate in 2016, while another 31% say they expect to maintain or reinvest their investments. Fetgatter’s reasoning for these results was that “the real estate fundamentals are sound; the economy continues to remain strong; there are opportunities across all sectors of the real estate spectrum and in both gateway and secondary cities…In an environment that is regarded both as the safest and most secure in the world, with a strong currency and the best opportunity for capital appreciation, the US is the safest harbor.”
With the very active and rising real estate market in the area, we see many investors looking to act quickly on exchanges and as a result we have seen a significant increase in reverse and improvement exchanges where investors have acquired replacement property before selling their existing investment properties. This allows investors much greater flexibility to accomplish an exchange and if properly structured, will have a successful result in deferring capital gains taxes.
Brendan Greene, Esq. is the co-owner and co-operator of the Greater Boston Exchange Company, LLC (a subsidiary of McCue, Lee & Greene, LLP), Boston.