What are the Chances of Section 1031 Being Limited or Removed?

Many taxpayers are anxious about the possibility that the 1031 exchange may be limited or removed from the Internal Revenue Code. In this article, we are going to talk about the likelihood of such a change and what the potential consequences might be.

Consequences of Removing the 1031 Exchange

Eliminating or even limiting the 1031 exchange would adversely hamper economic growth. Putting a damper on economic growth is just about the last thing we want to do as we continue to recover from the COVID-19 pandemic. The global pandemic will have rippling effects for years to come and we don’t know exactly what the impact will be. With that sort of uncertainty, it doesn’t make sense to disincentivize economic growth by limiting the 1031 exchange.

Taxes can be utilized for social programs, wealth redistribution, and also as a means for stimulating economic growth. With the current state of the economy, it’s essential to keep the pedal to the metal in terms of tax stimulation via opportunities like the 1031 exchange.

We need provisions like section 1031 to keep capital moving to the most advantageous areas of the market. Eliminating the 1031 exchange would result in less investment, deteriorating properties, a decrease in property values, and a loss of jobs.

1031 Exchange Company

CPEC1031, LLC is a 1031 exchange company based in the Twin Cities that facilitates like-kind exchange of real estate across the country. Our team of qualified intermediaries has been providing like-kind exchange services for more than two decades. Let us put that experience to work on your next 1031 exchange. Reach out to our team of 1031 exchange professionals today at our downtown Minneapolis office to learn more about our process and see how we can help.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

The Danger Behind Biden’s Plan to Restrict 1031 Exchanges

The resilience of the commercial real estate market has been put to the test during the past year and a half as the pandemic forced many retail centers, restaurants, hotels, and office buildings to close.  

Post-Pandemic Economic Recovery

Hope is on the horizon as more people get vaccinated and we begin to recover economically from the COVID-19 pandemic. Commercial real estate can (and should) play an essential role in that recovery. But President Biden’s plan to restrict 1031 exchanges to properties under $500,000 will have adverse effects that will cripple commercial redevelopment at a time when we need that investment more than ever.

The 1031 Exchange is Not a Loophole

One of the most pervasive and damaging myths surrounding 1031 exchanges is that they are a loophole of some kind that taxpayers use to avoid paying their fair share. This could not be further from the truth. Numerous studies have shown the opposite to be true. A microeconomic study on 1.6 million properties conducted by professors David C. Ling (Univ. of Fla.) and Milena Petrova (Syracuse Univ.) concluded that 80% of replacement properties acquired in a 1031 exchange were ultimately disposed of through a taxable sale, with all of the deferred taxes getting paid within roughly a 15-year window. A macroeconomic study initiated by Ernst & Young in 2017 and recently updated, concluded that if section 1031 was limited or repealed, it would shrink GDP by a whopping $9.3 billion per year. 

The Many Benefits of 1031 Exchanges

The economic benefits of 1031 exchanges far exceed the assumed cost to the Treasury from these temporary tax deferrals (with ‘deferral’ being the operative word – as these taxes are eventually paid). Ultimately, the Treasury receives its money, states and cities enjoy increased taxes generated by the healthy redevelopment of commercial property, and the economy is strengthened through job creation and retention.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Why 1031 Exchanges are Integral to the Health of the Economy

With the presidential election coming up in November, it’s time to take a look at the tax plans proposed by the candidates – particularly Joe Biden. The tax plan recently released by Joe Biden’s campaign unfortunately includes the complete removal of section 1031.

Here is a helpful breakdown of the tax plan in its entirety (with an excerpt about the 1031 exchange repeal below):

Eliminate real estate loopholes. Under current law, owners of appreciated real estate assets used in a trade or business can defer capital gains taxes when exchanging the asset for property of a “like kind.” The proposal would eliminate this tax benefit and treat such exchanges as taxable events.

As we’ve discussed before, removing section 1031 from the tax code is not the great money-saving idea that some politicians like to think it is. 1031 exchanges help to encourage growth and stimulate the economy. These exchanges are good for real estate investors large and small – not just the super-wealthy.

Downsides of Repealing Section 1031

Here are a few reasons why repealing 1031 exchanges is a bad idea:

• Protect 1031 like-kind exchanges to stimulate real property values and keep capital flowing in the economy.

• Illiquid real estate sales may be stifled if 1031 like-kind exchanges are terminated.

• 1031 has been around since 1921 because low unemployment is intrinsically tied to real estate growth.

• Real estate agents know that real estate sales and property values will suffer if 1031 is eliminated.

• Banks know that property owners won’t be able to refinance if real property values drop due to tax code changes; and then they won’t be able to invest as much in their properties to maintain and fix up properties; and the quality of real estate stock will suffer.

In 2015, the University of Florida conducted a study in which they estimated the U.S. Department of Treasury lost between $200 million and $3 billion in potential revenue as a result of section 1031. That being said, those figures assume that real estate developers would continue to sell properties (and take the resulting tax hit) in the absence of the incentives offered by the 1031 exchange. This is highly unlikely, and even the authors of the study admitted as much. The ripple effects of getting rid of section 1031 would have numerous negative impacts passed on to parties beyond the property owner.

For these reasons, it’s important that we work to keep 1031 exchanges alive for the overall health of the economy.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

The Devastating Economic Impact of Biden’s Proposed 1031 Exchange Repeal

Democratic presidential candidate Joe Biden's proposed tax plan would eliminate 1031 exchanges for taxpayers making more than $400,000 annually. While this may seem like a reasonable cut to some people, it would actually have a devastating impact on the real estate industry and the economy as a whole. In this article, we're going to discuss why eliminating 1031 exchanges would be bad for the economy.

Negative Impact of Eliminating 1031 Exchanges

Dismantling section 1031 would be detrimental to the commercial real estate industry and the greater economy. Farmers, bankers, title closers, and real estate agents would all suffer. Some are saying that Biden's targeting of like-kind exchanges is politically motivated, as President Trump has personally benefited from using 1031 exchanges in his own businesses. While that may be true, it's not a good reason to completely eliminate like-kind exchanges of real estate because real estate is an engine that drives economic growth and job creation.

1031 Exchange History

The 1986 tax overhaul really decimated the real estate industry for years afterward. This proposal would have a similarly devastating impact. Pull tax incentives from real estate and watch the economic carnage that ensues. Section 1031 has been a part of the Internal Revenue Code for decades and has survived numerous legislative changes. In 2017, the GOP tax plan that was signed into law (The Tax Cuts and Jobs Act) eliminated personal property exchanges of items like aircraft, art, and business equipment, but kept intact the provision for 1031 exchanges of real estate. 

Some commentators point out that unlike other investments that are untaxed while they are held, the value of real estate is constantly taxed during ownership through county and sometimes municipal property taxes, and taxed again on transfer through state deed tax or transfer taxes (which are based upon the value of the real property). Still other observers say that real estate is just plain more illiquid than other types of investments. 

Consequences for the Real Estate Industry & the Economy

Real estate closings are really complicated and difficult, and it takes much longer to market, sell, and close real estate than other types of investments. Without the extra inducement of 1031, the number of sales will plummet nationwide as owners will be locked-in for tax reasons, and also from the practicality of liquidity difficulties. This will be further exasperated by a lack of potential buyers because there will be nobody trying to exchange-up to buy their properties. The result will be that sellers will either choose not to sell to avoid being penalized with taxes...or won't be able to sell because the underlying demand from purchasers will be anemic. Ultimately, this will lead to stagnation, lower property values, and inefficiency in the marketplace.

It's not like the commercial real estate industry is soaring right now. As a result of COVID, the industry has fallen to new depths, with hotels and restaurants (among others) facing an existential crisis. Tapping the real estate industry to pay for the debt accrued because of COVID would be akin to kicking a person when they're down. Wouldn't it make more sense to have another industry that's doing really well right now pay for these services?

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Biden Tax Plan Would Eliminate 1031 Exchanges – Here’s Why That’s Bad

Democratic presidential candidate Joe Biden’s proposed tax plan would eliminate 1031 exchanges for taxpayers making more than $400,000 annually. While this may seem like a reasonable cut to some people, it would actually have a devastating impact on the real estate industry and the economy as a whole. In this article, we’re going to discuss why eliminating 1031 exchanges would be bad for the economy.

Negative Impact of Eliminating 1031 Exchanges

Here are some of the negative impacts that would result from the elimination of section 1031:

• Economic Stagnation

• Lower Property Values

• Less investment in workforce housing

• Fewer Jobs

• Less liquidity in real estate, resulting in declining living conditions and upkeep

The 1986 tax overhaul really decimated the real estate industry for years afterward. This proposal would have a similarly devastating impact. Pull tax incentives from real estate and watch the economic carnage that ensues.

1031 Exchange Professionals

At CPEC1031, we have over two decades of experience in the 1031 exchange industry. Our qualified intermediaries are well versed in the intricacies of 1031 exchanges and can help walk you through the entire process. Contact us today to learn more about the 1031 exchange process and how we can help you defer capital gains taxes on the sale of real estate. You can find us at our primary offices in downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved