The New York Real Estate News reported that the marketplace where lenders sell mortgages on office buildings, rental properties and other types of commercial real estate has ground to a halt as traders try to figure out how to price in risk amid the COVID-19 pandemic.
Possible Impact to Real Estate 1031 Exchanges
We are already seeing lenders putting the brakes on writing new loans and even canceling loans in process. This may impact the efficacy of 1031 Exchanges. They are in danger on upside exchanges because the buyer who just sold the property and is trying to trade up may not be able to get financing. Consequently, if their 1031 fails, they will owe substantial taxes. There is no planned legislation to bail out clients in this situation; however, investors in the middle of a 1031 exchange may now have a way out, if they act soon.
Deferred Sales Trust as a Real Estate Solution
Greg Reese, founder of Reef Point LLC, and authorized national Trustee for the Deferred Sales Trust is a nationally recognized expert on capital gains mitigation in real estate transactions has written a blog about using the Deferred Sales TrustTM to Rescue a Failed 1031 Exchange. See Using the Deferred Sales Trust to Rescue a Failed 1031 Exchange
In short, your 1031 exchange accommodator may cooperate with you to complete your exchange with a substitute vehicle (the Deferred Sales Trust) whereby your proceeds will be transferred in your direction to a specialized trust created independently from you, which keeps you from having constructive receipt of the proceeds. Once the trust is funded, you will have the ability to direct the investment of the tax-deferred proceeds. You may choose to invest in cash, marketable securities or any other investment allocation that suits your requirements. You may even park the cash and wait for the opportune time to get back into real estate, without the timelines and restrictions commonly associated with a 1031 exchange.
The Deferred Sales Trust is a proprietary strategy that has been around for more than 21 years but is not yet universally known. It has withstood IRS and FINRA scrutiny and has successfully helped close over 3,000 transactions without a single adverse finding or consequence. It is possible that your particular 1031 accommodator is not yet aware of the use of the Deferred Sales Trust as a 1031 alternative or rescue. You need not have identified the Deferred Sales Trust within your 45 day identification period. Our team can assist your accommodator in any necessary due diligence required for them to cooperate with you, should your exchange transaction be in need of a rescue, or you simply wish to create a risk-free backup plan, in case your upside transaction is in jeopardy of failing.