One of the perks of our profession is that we gain insight into future state and federal laws that can affect our livelihoods.
You see, the commercial real estate lobby is pretty powerful. Recall the tremendous push that took place in California last year to thwart Proposition 15, which would have changed the way property taxes are calculated on commercial property.
A deferred property tax exchange is being discussed in Congress through Section 1031 of the Internal Revenue Code. The repayment for the huge infrastructure plan has to come from somewhere, and wealthy commercial property owners are a likely target.
For a quick review, the tax deferred exchange allows commercial property owners to defer capital gains taxes when selling an income generating property. Certain criteria and timeframes must be met. Otherwise, when a sale takes place, approximately 50% of the increase in value is consumed by federal and state tax collectors. Therefore, except in extreme cases, the motivation to sell would disappear.
A webinar hosted by David E. Franasiak, Attorney at Williams and Jensen, PLLC, and Julie Baird, President of First American Exchange Co., discussed the Biden administration's American Families Plan and the end of a special property tax break, " the real real estate investors who defer taxation when they trade property for profits in excess of $ 500,000. "
With a $ 1 million limit on couples filing together, section 1031 would effectively be killed, and if the proposal went into law, it could go into effect for deals closed after December 2021.
I want to look at stock exchanges from a different angle: are they really important to those who do not own commercial real estate? Admittedly, since I am biased, I simply offer three thoughts to consider.
Commercial real estate transactions employ a significant number of people. My premise? Eliminating transactions lured by tax deferrals would also destroy all jobs associated with those deals.
I once calculated that 32 different people were involved in a purchase. In particular, trustees, title officials, environmental verifiers, roof inspectors, general contractors, sub-general contractors – air conditioning, electricians, plumbers, flooring. Not to mention professionals such as accountants, lawyers, and investment advisors. Loop in a few brokers and the ensemble is complete. The dollars earned by those involved flow back into the economy, groceries are bought, rents are paid and college funds are set up. And state and federal income taxes are paid on their earnings.
Small business owners who live by ownership in commercial real estate use the tax deferred exchange mechanism to expand their business. Remember, business owners use IRS Section 1031 to buy larger facilities and grow their business. Operational growth means buying equipment, hiring workers, and generating taxable income.
The abolition of the tax deferred exchange rate mechanism would reportedly generate $ 19.5 billion over 10 years with a stimulus package of $ 2.4 trillion. Unfortunately, the increment is so small that it resembles a rounding error. Too often we lose sight of the unintended consequences of our actions.
For example, when access to home loans was expanded two decades ago, the subprime crisis arose. Granted, there was more to this story. But you get the idea.
Allen C. Buchanan is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at email@example.com or 714.564.7104. His website is allencbuchanan.blogspot.com.