Market Recap
Despite some uncertainty early in the first quarter of 2024, risk assets such as stocks and high yield bonds continued to outperform more defensive asset classes (see chart below). The S&P 500 Index set 22 new all-time highs during the quarter, as enthusiasm over generative AI and economic resilience helped ease concerns around interest rate policy, geopolitical uncertainty and the upcoming presidential election. From a style perspective, growth stocks once again outperformed handily early in the quarter, led by the so called ‘magnificent seven’ tech and AI stocks. Later in the quarter, however, equity market returns began to broaden out as investors pivoted to more value and small-cap stocks. Outside the U.S., developed and emerging market equities also delivered positive returns for the quarter as upbeat economic data and optimism about possible interest rate cuts from central banks bolstered investor sentiment.
Over in fixed income markets, conditions were far less favorable for investors as the Bloomberg Aggregate Bond Index was down -0.78% for the quarter. Better than expected economic data and diminishing expectations for rate cuts drove valuations down on more interest rate sensitive assets, particularly government bonds. Meanwhile, the same upside growth surprises helped more speculative areas of fixed income, particularly high-yield and emerging market debt, perform better.
| Q1 2024 | Trailing 12 Months | Trailing 3 Years | Trailing 5 Years | |
| S&P 500 | 10.56% | 29.88% | 11.49% | 15.05% |
| Russell 2000 | 5.18% | 19.71% | -0.10% | 8.12% |
| MSCI All Country World Ex-US | 4.69% | 13.26% | 1.94% | 5.97% |
| Bloomberg US Aggregate Bond | -0.78% | 1.70% | -2.46% | 0.36% |
| Bloomberg Commodity Index | 2.19% | -0.56% | 9.11% | 6.38% |
| Dow Jones Comp. All REIT Index | -1.26% | 8.34% | 2.08% | 3.62% |
7 Basic Rules For 1031 Exchanges
If you have bought and sold investment property, you have probably heard about the 1031 tax deferred exchange. At its core, a 1031 exchange offers real estate investors a powerful strategy for deferring capital gains tax when selling and purchasing like-kind properties. While this might sound appealing, navigating the complex rules governing this process can be a daunting task for inexperienced real estate investors. To help you reap the tax benefits of a successful transaction, we’ve outlined seven pivotal rules you should know about the 1031 exchange:
1) Like-Kind Property
The essence of a 1031 exchange is that the property being sold and the property being acquired must be like-kind. But this is a broad term that generally means properties of a similar nature, even if they differ in grade or quality. For example, an apartment building could be exchanged for other real estate such as a rental home or office building, so long as the additional requirements below are met.
2) Business or Investment Use
Both the relinquished property and the replacement property must be real property held for productive use in a trade, business or investment. Therefore, a personal residence or vacation home would not qualify as like-kind properties.
3) Equal or Greater Value
The cost of acquiring a replacement property must be greater than or equal to the exchange fund value. The exchange fund value typically represents the equity, debt and any profits earned from the sale of a relinquished property. Additionally, transaction fees and other expenses related to the sale of a property will reduce an investors exchange fund value.
4) Same Taxpayer
The taxpayer selling the relinquished property must be the same taxpayer that acquires the replacement property in the exchange.
5) Reinvestment of Proceeds
To fully defer capital gains taxes, all proceeds from the sale of the relinquished property must be reinvested into the replacement property. For example, if the net proceeds from the relinquished property consist of 70% cost basis and 30% capital gain, the investor can’t keep the portion related to basis and only reinvest the capital gain.
6) 45-Day Identification Window
After closing the sale of the relinquished property, investors have 45 calendar days to identify up to three like-kind replacement properties. Investors can identify 4 or more replacement properties, as long as their combined value doesn’t exceed 200% of the fair market value of the relinquished property.
7) 180-Day Purchase Rule
After the initial 45-day identification period, investors have an additional 135 calendar days to complete the purchase of one or more of the identified replacement properties. If the deadline passes before the purchase closes, the exchange is considered failed and the funds from the original property sale become taxable.
If executed properly, the 1031 exchange strategy can positively impact an investment portfolio by deferring taxes, thereby preserving capital for future investments. However, the process is laden with strict rules and risks that are even more complicated than what we’ve covered. For this reason, we recommend that any real estate investor considering a 1031 exchange consult with a tax or CERTIFIED FINANCIAL PLANNER™ professional who can help them successfully navigate the process.
Who’s Your Beneficiary?
With tax season finally behind us, it’s the perfect time to review your bank accounts, 401(k)’s, IRA’s, and life insurance policies to make sure your beneficiaries are up-to-date and aligned with your estate planning goals. This is especially important if you have recently experienced a major life change such as the birth of a child, death of a loved one, marriage or a divorce. Beneficiary designations take precedent over anything stated in your will, therefore, failure to keep them updated may result in your assets going to unintended beneficiaries as well as unnecessary hassle, cost, or hardship for your loved ones.
If you have questions or would like to discuss any of the information contained here in greater detail, please do not hesitate to contact us.
Sincerely,
AJ, Ryan, Gary, Rhonda and Tom
AJ Gilbert, CFP®
Ryan McCafferty, CFP®
Gary Fortier, CPA
Rhonda Gilbert, CPA
Tom Savage, CPA
Disclosures
Keystone Financial Group, Inc. does not provide legal or tax advice
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The indices mentioned are not managed and cannot be invested in directly. Past performance does not guarantee future results. Diversification and asset allocation strategies do not assure a profit or protect against loss.
Sources used for the article:
- *Global Markets Quarterly Update – T. Rowe Price Investment Research
- *Quarterly Market Review – J.P. Morgan Investment Research
- *What are the Rules of a 1031 Exchange? – Asset Preservation Incorporated