It's not just clients making using of 1031 exchanges-advisors are using them, too. In fact, Middleton says he did one seven years ago with a partner in which they exchanged a condominium in Bend, Ore., for raw land there. "The original reason I bought it was to go skiing, but I wasn't getting the use out of it I wanted," he says. "Since the condo was in a resort area, there were a lot of fees, we were paying monthly maintenance and so forth, and we'd already benefited from the depreciation of it. The cash flow was at best even and certain months negative."
Although the condo sale produced only a 5% gain, the raw land has doubled in value and has a lot fewer expenses, he notes.
Advisor Richard Hammel, founder of Hammel Financial Advisory Group in Nashville, Tenn., also has helped clients do 1031 exchanges and did one for himself. In his exchange, Hammel took proceeds from the sale of an auto parts store, which he and his brother owned as tenants in common, and invested his share in an office condominium.
"There's always an opportunity for this because people have a lot of value in real estate. We've done it with clients where they had farmland with a low basis that they inherited many years ago and they exchanged it for rental condominiums," he says.
The FEA's Egan says he thinks the aging of the population also is generating more interest in 1031 exchanges. "We're finding a lot of people-and baby boomers are now getting into this age category-want to get out of active and aggressive real estate investments and do something more passive so they don't have to worry about collecting rent."
Raw land is one option, he says, as well as sponsored tenancy in common arrangements.
LeBlanc agrees a lot of aging landlords are looking for alternatives. Although 1031 exchanges may provide big tax advantages, some clients forego doing one because they no longer want to own commercial property. Others do an exchange, but might sell a four-family and buy a two-family. Still others might sell a larger rental property and buy a single-family summer rental, with the idea of converting it in the future to a second home, LeBlanc says.
John Kimball, principal partner of The Exchange Authority, a qualified intermediary based in Boston, believes the increase in 1031 exchanges has resulted because people have become more aware of them. "I think the public is certainly becoming more aware of the benefits of doing an exchange, and their advisors are pushing the transactions more today," he comments.
Mary B. Foster, general counsel for Section 1031 Services Inc., a qualified intermediary in Bellevue, Wash., notes the U.S. Department of the Treasury adopted regulations in 1991 that clarify how 1031 exchanges should be done and made them easier to do. "I know from talking with other intermediaries that the volume seems to be increasing as more people learn of the benefits," she says. "This is true even with the down economic times. The lower capital gains rate will have a minor impact."
That's because the tax rate on unrecaptured depreciation remains at 25%, so there are still great benefits for improved real estate exchanges, adds Foster, a member of the American Bar Association Tax Section Committee that made recommendations to the IRS on how to increase taxpayer compliance with the 1031 rules.