Colorado-Real-Estate-Journal_491639

November 5-18, 2025 - Page 23 www.crej.com 1031 Exchange I f you’re a business owner in Colorado, California, Connecticut or elsewhere who has ever sold a commercial real estate property, you know how quickly taxes can eat into your hard-earned equity. Between federal capital gains, deprecia- tion recapture, and state income taxes, it’s common for 30% to 40% of the profit to vanish. Years of investment and value creation can be slashed in a single trans- action. This is why the 1031 exchange matters. Far from being a loop- hole or risky tactic, it’s a long- established provision in the U.S. tax code designed to encourage reinvestment in real estate and continued economic activity. For business owners and inves- tors, it can mean the difference between watching equity erode through taxation or keeping that money working for you toward future growth. A 1031 exchange allows a property owner to sell an invest- ment or business-use property and reinvest the proceeds into another “like-kind” investment while deferring capital gains taxes. “Like-kind” often causes confusion. Many assume it means swapping one office for another office or one warehouse for another warehouse. In real- ity, the Internal Revenue Service definition is broad – an office condo can be exchanged for an industrial warehouse, agricultural land for retail p r o p e r t y . You get the idea. The key is that both p r o p e r t i e s must be held for invest- ment or pro- ductive business use. This investment flexibil- ity makes the 1031 exchange a powerful tool. It allows prop- erty owners/investors to adapt as companies grow, markets shift or long-term wealth goals evolve. Rather than being locked into one type of asset, owners can reposition capital into prop- erties that better fit their needs. The financial difference can be dramatic. Consider a busi- ness owner who bought a light- industrial property for $750,000 and sells it for $2 million. With- out a 1031 exchange, taxes could easily reach $400,000 or more, leaving only $1.6 million for reinvestment. With a 1031 exchange, the full $2 million can roll into a new property. Com- bined with financing, this could mean acquiring a larger build- ing or one with a higher invest- ment yield. For many Denver area busi- nesses, that means mov- ing from a cramped, out- dated facility into a prop- erty that sup- ports growth for the next decade. The point isn’t just tax deferral; it’s the ability to use every dollar of proceeds to strengthen an investor’s or business own- er’s position. The IRS enforces strict rules, and missing them can nullify the exchange. Property owners have 45 days from the sale to identify potential replacement properties in writing, no extensions, peri- od. Then the replacement prop- erty purchase must close within 180 days of the original sale date. While six months sounds like a long time, financing and the due diligence process often com- presses the timeline. Note, the initial sale proceeds cannot be received directly by the property owner/seller; they must be held by a qualified intermediary who facilitates the exchange; and, both the relin- quished and replacement prop- erties must be used for business and/or investment purposes – personal residences don’t quali- fy for an exchange. Missing the deadlines or mishandling funds will result in losing all tax-defer- ral benefits. While the concept is straight- forward, execution often proves challenging. Common pitfalls include waiting too long to start the process, identifying too few properties, encountering financ- ing delays, or trying to manage the process without professional guidance. Many sellers list their property before contemplating replacements, causing them to scramble once the 45-day clock starts. The IRS allows an exchanger to identify multiple options for a reason – deals fall through. Lenders also move at their own pace, which can create bottlenecks in the process and potentially cause an exchange to fail. Because the process involves commercial real estate brokers, certified public accoun- tants, attorneys, QIs and lenders, a coordinated team approach is critical. Denver’s commercial real estate market makes this strat- egy especially relevant. Indus- trial properties, after years of appreciation, are seeing some softening. Vacancy rates have risen to nearly 9%, the highest in years, but remain relatively healthy by national standards. Demand from manufacturing, logistics and distribution users continues to provide stabil- ity. Office properties are facing more pressure. Many office sub- markets have higher vacancy, depressed tenant interest, low tenant finish allowances, and overall property values are under significant strain. Still, forecasts suggest office demand could con- tinue rebounding over the next 12 to 24 months as businesses recalibrate space needs and inter- est rates decline. This unique dynamic creates an opportunity for some investors. Owners of industrial or office assets may use a 1031 exchange to exit properties that are under- performing and reinvest in stron- ger ones. It’s an effective way to reposition a portfolio in response to market shifts without trigger- ing immediate tax obligations. Beyond timelines and IRS rules, the broader benefit is stra- tegic. A 1031 exchange isn’t just about deferring taxes – it’s about preserving equity, scaling a busi- ness and building generational wealth for your family. Keeping capital working allows owners/ investors to upgrade facilities, diversify holdings and prepare for future cycles. Alternatively, an investor will be forced to write a check for hundreds of thousands or millions of dollars to the IRS 1031: Understand the rules & their potential benefits Justin Rayburn Principal, Fountainhead Commercial Lowrey Burnett, CCIM Principal, Fountainhead Commercial Carma Weymouth VP, Division Manager 303.780.4015 cweymouth@stewart.com April Knott VP, Business Development Of cer 303.875.7565 april.knott@stewart.com We invest in the technology, skill and resources to navigate your commercial transaction. Combining our local market expertise with international reach, we take a customized, trusted partner approach. Contact us to learn more. © 2023 Stewart. All rights reserved. Solutions that Span Your Transaction Across Town. Across the Globe. Please see Rayburn, Page 51