Real Estate Industry Fights 1031 Repeal

Real Estate Industry Fights 1031 Repeal
 

Source: By KATIE THISDELL, The Daily Transcript

Friday, July 3, 2015

 An academic study set to be released by the National Association of Realtors this week should give some insight into the 1031 exchange industry over the past two decades.

The study, authored by real estate finance professors at the University of Florida and Syracuse University, found there are by far more 1031 exchanges done in California than anywhere else in the country, and that the West dominates the market to a surprising extent, said Evan Liddiard, senior policy representative for Federal Taxation with the National Association of Realtors.

The study analyzed 1.6 million commercial real estate transactions reported by CoStar Group from 1997 to 2014. It will be formally released July 9. 

Internal Revenue Code 1031 allows an investor to exchange a business or investment asset -- ranging from art to livestock to buildings -- for another and to defer all capital gains taxes. But it’s being threatened by tax reform, and the real estate industry has been fighting tooth and nail to save the investment strategy. 

During a recent event at the San Diego County Taxpayers Association, Liddiard previewed that the study found 88 percent of like-kind exchanges were followed by a taxable sale.  

“People are putting more money into the properties they’ve exchanged, making them more valuable, they’re growing and when they finally do sell, the government gets a reward for having given that tax deferral,” Liddiard said at the panel event. “This is going to be great when we take it to Capitol Hill. In the vast majority of cases, the government is coming out ahead.”  

Proponents hope that statistic should give some strength to the real estate industry’s fight to preserve the 1031.

“When you have the White House advocating for a cap, and you’ve got a Republican in the House and a Democrat in the Senate all calling for repeal, you know you’re in serious trouble,” Liddiard said. “It’s not that they hate 1031 by itself, it’s just that they see it as a goal to achieve this other goal of lowering the tax base. It’s a convenient target because people don’t know about it, and people don’t care about it.” 

Liddiard also gave an overview of federal taxes and the 1031 to a group of real estate agents at a Greater San Diego Association of Realtors event last month.

In a study released earlier this year, EY found that a repeal of the 1031 exchange could contract the economy, which Liddiard points out is opposite of the goal of tax reform. Elimination could cause an annual drop of $8.1 billion to the national GDP, and could cause a long-run negative impact of $8 billion in economic growth for the real estate industry alone.

The 1031 is also a tax deferral, not a tax-free loophole, noted Suzanne Goldstein Baker, executive vice president and general counsel for Investment Property Exchange Services Inc. 

“It’s really an important planning tool to defer taxes to better manage capital and cash flow,” Baker said.  

“It’s important to a broad spectrum of taxpayers.” 

Alan Nevin, head of economic and market research for Xpera Group, echoed Liddiard’s sentiments about the impact of 1031, and said when a home is sold or changes hands, it sets off a chain of spending, particularly related to renovations.

“Every time there’s a 1031, there’s a property somewhere that has increased in value and has higher property taxes,” Nevin said. “If you put another burden on the commercial side, you’re dampening the appetite for people to trade in properties.”

Local and state governments live and die on these property taxes, along with sales tax. If 1031s are done away with, this revenue – which funds schools and more – drops. Nevin said the 1031s don’t have an effect on the federal level, making it an easy scapegoat. 

NAR isn’t ruling out the potential for tax reform this year, but Liddiard anticipates the discussion will carry to 2017.

DISCLAIMER: This blog/article has been curated from an alternate source and is designed for informational purposes to highlight the commercial real estate market. It solely represents the opinion of the specific blogger/author and does not necessarily represent the opinion of Pacific Coast Commercial. www.PacificCoastCommercial.com

 

 

Keywords: San Diego Commercial Real Estate For Sale, Commercial Property In San Diego, Commercial Real Estate In San Diego, San Diego Investment Real Estate, Commercial Property Management In San Diego, San Diego Commercial Property Management, Commercial Property Management San Diego, Managed Commercial Property San Diego, Commercial Property For Sale San Diego, San Diego Commercial Real Estate Leasing