Years of high interest rates have taken their toll on 1031 exchange transactions, deals popular in commercial real estate because they let investors defer capital gains taxes when selling a property to buy a similar one.
These transactions, named for the corresponding 1031 section of the U.S. tax code, fell to $11.9 billion last year, according to CoStar data. That’s the lowest annual volume since 2012 when $9.4 billion traded hands.
The exchanges had gained in popularity as the country began to recover from the Great Recession in 2008-2009 with an average annual volume of $33.7 billion over the next 10 years.
The Federal Reserve began raising the federal funds borrowing rate in February 2022 in an effort to reduce inflation. Rates climbed from 0.08% to 5.33% in August 2023 and stayed there until the Fed began cutting again in September 2024.