1031 Exchanges During A Recession

By: D. Moore

This fluctuating economy necessitates a change in investment strategy. Consider the typical investor's strategy: buy and sell during periods of inflation and go into hiding during recessions. Although a common, this strategy may not be the best. The cycle of recession and inflation is a fact of life in a free economy…one follows the other systematically. If you are a successful investor who has met your investment goals during an inflation period, then moving to Hawaii may be a great way to spend the on-coming recession. However, if you have not been so successful, then waiting for the recession to pass may seriously damage your investment program.

We are seeing the characteristics of a recession now as the economy drastically slows down.
* Loans are hard to find.
* Unemployment rises as businesses reduce their work force in preparation for a reduction in demand for their goods or services.
* Salaries are frozen or increased in small amounts.
* Tenants cannot pay rent increases easily.
* Businesses will not expand to fill vacant space.
* Buildings that cannot give an investor a decent return based upon current conditions will not sell.

Many property owners with break-even or positive cash flows will choose to wait out the recession, but the relationship between time and the value of money strongly indicates a different approach.

For instance, if an investor has $200,000 net equity in a building and the recession lasts two years, the investor may lose two years' worth of equity growth. He may have to retire two years later or live on a reduced income at retirement. If the investor sold his property instead and took a reduction in price leaving only $185,000 in net cash equity, he would be free to look for bargains that will make up the $15,000 loss plus produce profits far greater than his current property will generate. Holding a property may be the least profitable path to increasing wealth during a recession.

You must have cash or its equivalent to take advantage of a recession. From a tax perspective, if you sell, then offset capital gains with suspended losses. Otherwise, be prepared to use a 1031 real estate exchange to preserve the equity remaining. By using the 1031 exchange, you can reduce your sale price below street value and still preserve the bulk of your equity for reinvestment.

Recession investing requires that you solve someone else's problem by reducing their. Many strategies that would not work during an inflation period are very effective during recessions. Using equity and third party notes as a down payment, employing creative seller financing, consolidating or diversifying through exchanging, equity participation, lease options, etc. are only a few of the many ways investors can take advantage of the difficulties recessions create for other owners.

The underlying principle to all recession strategies is not to invest on the basis of anticipated growth. Rather invest with the following in mind:

* Buy a positive cash flow
* Pay less than the property is worth
* Arrange transferable financing that increases value
* Buy in areas that have a strong, diversified economy that will grow as the recession ends
* Buy a property that will survive the recession, no matter how long it lasts.

~D. Moore, 2009

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David Moore is the CEO of Equity Advantage, Inc., a nationally recognized 1031 Exchange facilitation leader. Visit Equity Advantage to get help with your recession investing strategy.

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