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1031 Exchanges?
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Biden’s Plan to Eliminate 1031 Exchanges
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Election years always have an element of uncertainty associated with them. Owning and managing investment realestatepresentsenoughchallenges,especiallyduringdifficulteconomictimes,sothepotentialforsignificant policychangeonlymakesthejobthatmuchmoredifficult.2020hasalreadybeenan“unprecedented”yearandnow PresidentialcandidateJoeBidenwantstoeliminateSection1031 fromthetaxcodetofundhisproposalforuniversal childcare and in-home care for seniors.
What is a 1031 Exchange?
IRCSection1031 allowsforthetaxesassociatedwiththesaleofinvestmentpropertysuchascapitalgainstaxand depreciationrecapturetaxtobedeferred,provided“like-kind”realestateisacquiredwithin180daysfollowingthesale oftheoriginalproperty.Commonlyreferredtoas“1031 Exchanges”,IRCSection1031 hasbeenpartofourtaxcode for nearly 100 years and is utilized by thousands of small and large investment property owners every year. For further information on the history, rules, benefits and strategies available using 1031 exchanges, please visit our website at www.re-transition.com and download our free guide: “Understanding 1031 Exchanges”
Why Eliminating IRC Section 1031 is a Bad Idea?
PresidentialcandidateJoeBidenportrays1031 Exchangesasataxloopholeforthewealthy,eventhough1031 Exchangesareclearlycodifiedwithinourtaxcodeandareavailabletoallownersofinvestmentrealestate–regardless ofthepropertysizeorindividual’sincome.Hisproposaleliminatestheuseof1031 Exchangesfortaxpayerswith annual income in excess of $400,000. Limiting the use of 1031 Exchanges is not only bad policy but reveals a lack of understanding of the role real estate plays in our economy.
RealestaterepresentsamajorportionoftheU.S.economy.AccordingtoIbisWorld,aglobalindustryresearchfirm, commercialrealestateemploysnearly3.3millionindividualswithintheUnitedStatesandistheU.S.’s7thlargest industry.RealestateissuchalargeU.S.industry,inpart,becauseoftheabilityforcapitaltomoveefficientlybetween properties.1031 Exchangesareamajordriverofthatefficiency.Utilizinga1031 Exchange,capitalcanbereinvested from one property to the next without a significant reduction from taxes. The movement of capital creates economic opportunityforbrokers/agents,consultantssuchasappraisers,lenders,bookkeepers,propertymanagers,construction workers, insurance agents and many other hardworking individuals. Candidate Biden talks about the taxes that are deferred annually through 1031 Exchanges as if these dollars would then be available to spend on social programs, which they will not. The reality is the volume or “velocity” of real estate transactions would decline significantly and withthatdeclinewouldcomethelossofhundredsofthousandsofjobs.
California’simplementationofProposition13in1978isaperfectexampleofhowthisconceptwouldplayout. Proposition13statedthattheassessedvalueofpropertyfortaxpurposescouldnotincrease (continued on page 9)
2020 1031 Exchanges Cont.
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morethan2%annuallybeyondthe1976value,unlesstherewaseitherachangeofownershiporcompletionofnew construction.Theresult?Individualsowningpropertywithafairmarketvaluethatexceededtheassessedvaluefor property taxes purposes refused to sell their property due to the increased taxes they would bear upon the purchase of newrealestate.Manypropertieswentunderutilizedandundevelopedbecausethetaxstructuremadeitunattractiveto either sell or improve. The same series of events would play out if 1031 Exchanges were limited.
This is not the first time eliminating 1031 Exchanges has been discussed as a means to narrow the deficit between our Federal tax revenue and Federal spending, nor will it be the last. Fortunately, several respected economists have studiedtheimpactsoftheproposalandtheresultsarefarfromfavorableforAmericans.A2015reportco-producedby DavidLingoftheUniversityofFloridaandMilenaPetrovaofSyracuseUniversityentitled“TheEconomicImpactof RepealingorLimitingSection1031 Like-KindExchangesinRealEstate”states: “[…] thecostoflike-kindexchangesislikelylargelyoverestimated,whiletheirbenefitsareoverlooked.Theelimination of real estate exchanges will likely lead to a decrease in prices in the short run, followed by an increase in rents in the longer run. These negative effects will be more pronounced in high tax states. Elimination will also likely produce a decrease in real estate investment, increase in investment holding periods, and an increase in the use of leverage.”
Inthesameyear,Ernst&Youngproducedareportquantifyingtheimpactofeliminating1031 Exchangesatanet reductioninGDPbetween$61 billionand$131 billionovera10-yearperiod.In2016,theTaxFoundationproduceda reportstatingthateliminating1031 Exchangeswouldprovide$4billionofadditionalannualtaxrevenueatacostof$18 billioninGDP–hardlyareturnoninvestmentanyonewouldconsiderattractive.
Insummary,1031 ExchangescreatejobsthatbenefitmillionsofAmericans.Section1031 isnotataxloophole,buta very intentional section of our tax code that benefits individuals of all economic levels. Do wealthy real estate investors benefitfrom1031 Exchanges?Yes.Do“momandpop”propertyownersbenefitfrom1031 Exchanges?Yes.Dotenants andsmallbusinessesbenefitfrom1031 Exchanges?Absolutely.HopefullyCandidateBidenwillmovebeyondpolitical rhetoric and take a good look at the economic data to support maintaining 1031 Exchanges. Failure to do so will negatively impact an industry already being asked to shoulder a significant portion of the turmoil that has resulted from Covid-19 and is quite simply bad economic policy, in my opinion.
If you are considering a 1031 Exchange and have questions, contact Real Estate Transition Solutions to schedule a complimentary consultation. Our free consultations can be done over the phone, via web meeting, or in person at our office in Mercer Island, Washington, or in Portland, Oregon. To schedule your free consultation, call 206-686-2211, email info@re-transition.com, or visit www.re-transition.com/free-1031-consultation.
Austin Bowlin, CPA – Partner at Real Estate Transition Solutions, provides exit strategy analysis, execution, potential income, and equity replacement options for investment property owners. About Real Estate Transition Solutions Navigating the Exchange process successfully can be challenging and complex. For over 20 years, Real Estate Transition Solutions has helped investment property owners navigate and execute tax-deferred 1031 Exchanges, Delaware Statutory Trusts (DSTs), complex real estate investments, and tax planning strategies. Our team of dedicated 1031 Exchange consultants help clients select and acquire Exchange properties that seek to meet their financial and lifestyle objectives. To learn more about Real Estate Transition Solutions, visit our website at www.re-transition.com. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potentially adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for guidance regarding your individual situation. Real Estate Transition Solutions offers securities through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Real Estate Transition Solutions is independent of CIS and CAM.
www.rhaoregon.org RENTAL ALLIANCE UPDATE October 2020 9
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This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax and legal professional for details regarding your situation. This material is not intended as tax or legal advice. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities. Preferred return is not guaranteed, and subject to available cash flow.