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study initiated by Ernst & Young in 2017 and recently updated, concluded that if section 1031 was limited or repealed, it would shrink GDP by a whopping $9.3 billion per year.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.
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