INTEREST RATE HIKES POSE NEW CHALLENGES TO SUCCESSFUL 1031 EXCHANGES

In addition to fueling the recent bid ask spreads that has led to a drop in available properties, higher interest rates and tighter lending have also caused unintended complications to 1031 exchanges.

When an investor is looking at replacement properties, they must replace the sale price. Given the example if a seller sold their property for $1m with 50% LTV they must replace the $1m when they purchase the replacement property.

In the case of a seller who is considering a DST with 45% debt, they must either come up with the difference in cash or pay tax on the boot.

In the last 6 months we have seen many DST sponsor syndicate DST’s well under 50% LTV whereby a year ago we were still seeing 60% LTV.

Another observation which is becoming a trend of sorts, is sellers are having to hold a note (seller financing) because the buyer cannot secure enough debt due to tighter lending by institutions.

When a seller holds a note, it potentially could cause the entire value of note to become a taxable boot.

For sellers to have the best chance to have a successful 1031, engaging in conversation with qualified professionals prior to sitting at the closing table will only increase their chances of a positive outcome.?