Why Do a 1031 Exchange?

Wally Smith:
1031s, they’ve been around a long time and it’s a like kind property held for investment purposes.

Jeff Hertz:
Correct.

Wally Smith:
And also as far as the structural changes, it’s got to be for a business reason, it cannot just be to play the tax code. So there really needs to always be a business reason. Why are we doing this? To alter the structure, change the structure in it. But with the 1031s, I guess let’s talk about that a little more. They’ve been 1031 into, we’ve seen a variety, I had a farmer out in Nebraska who had a million dollars of water rights on a property and didn’t need them. And so he was able to do a 1031 exchange of those and went into multifamily apartment buildings, and gosh, might have been storage unit, something else. That was great. He had no idea you could do that.

Jeff Hertz:
There’s kind of, as they say, many ways to skin a cat. There’s a lot of different ways to look at it. It depends on, as you said, the rationale and the background of it. They may be looking at the financial reasons for doing a 1031 exchange and maybe to simplify their lifestyle, maybe they’re at a retirement age where they want to just not have the direct involvement in the real estate assets any longer.

Wally Smith:
We see that a lot.

Jeff Hertz:
We even see people who, I’m not sure if this is quite as much the case now, but owned investments in extremely highly appreciated markets. And I guess you could say that certainly here in Denver, you could be in a neighborhood or a part of the city that has gone up tremendously, and you say, I’ve got an opportunity to buy another property in another market, or another part of the country where I feel like there’s more runway to eventually see some appreciation. We’ve seen a lot of those types of situations.

Wally Smith:
We’ve had some of those recently, trades that have been owned for 50 years in downtown San Francisco. Pretty appreciated. And talk about the risks there, that’s another big element as far as if you want to reposition a piece of real estate. I always try to look first and foremost at the investment, it’s got to be a good investment. Then let’s look at the taxes. But if it’s not a good investment, taxes aren’t going to make up for it. Right. So being able to reposition into a better market, as you say it’s got more runway, more potential, or let’s say it doesn’t have as much what I call legislative risk. Where, for instance San Francisco, one of the things they were afraid of was the seismic assessments.

Jeff Hertz:
Sure.

Wally Smith:
Which complete wild card. They got out and were able to position them into, I think a portfolio of four or five different products around the country. So that was great. Geographic diversification, sponsor diversification, market sector diversification. That was a good one.