An important instrument for the recovery of our American economy is at serious risk as part of the $ 1.8 trillion American families plan considered in Washington – and the damage will be felt in every state, city and town still suffering from the ravages of COVID-19.
Over the past 100 years 1031 similar exchangeswhich allows investors to defer taxes on profits from the sale of real estate by reinvesting that money in new real estate has been a cornerstone of the US commercial real estate market, bringing economic benefits at all levels that far exceed the amount of deferred taxes. The $ 1.8 trillion plan presented last month by President Joe Biden proposes to cap the amount of profit that can be deferred at $ 500,000.
This short-sighted and counterproductive ceiling is a recipe for economic stagnation, not recovery.
Every community in the country, including San Diego and the entire state of California, has seen countless shopping malls, strip malls and restaurants shut down due to the pandemic. Precipitation continues in hotels and office buildings. Virtual meetings will forever replace business travel, and many people will work exclusively from home.
Substantial reinvestment for the conversion of these properties and the reconstruction of commercial space will be required to restore the economy. Section 1031 provides important capital to revitalize communities in San Diego and throughout Southern California and grow our economy.
IN Federation of Exchange AgentsA national organization of 1,031 listed companies analyzed and summarized data from seven companies in California from 2015 to 2019 and found:
- 72,787 properties participating in exchanges
- The total amount of exchanges was $ 160.3 billion.
- $ 2.74 billion from California transfer taxes, mortgage taxes, and registration fees.
It is estimated that between 15% and 20% of all commercial transactions involve the exchange of 1031. It provides fundamental real estate liquidity. It is clear that Section 1031 is important to the real estate economy in Southern California and generates significant tax revenues for both county and city governments.
Proponents of the restriction argue that the provision is a “loophole” used to avoid paying taxes. In fact, the exchange of 1031 is a deferral, not a tax cancellation. According to research80% of taxpayers only make one 1031 exchange and then sell the property as part of a taxable sale, which means taxes are paid over approximately 15 years.
Limiting the ability to reinvest in commercial real estate and property renovation at this critical juncture in our country’s economy would send the already struggling commercial real estate market into a tailspin.
Ernst & Young It is estimated that reinvestment through 1,031 exchanges in 2021 will support more than 560,000 new jobs with more than $ 27.5 billion in labor income, generate $ 5 billion in federal taxes and add $ 55 billion to GDP. That $ 5 billion in federal taxes received in one year is well above Biden’s 2021 budget estimate, which says the $ 500,000 cap for 1031 increases by an average of $ 1.95 billion per year over 10 years.
So why would anyone change Section 1031? It doesn’t make money.
In truth, such exchanges play a critical role in many aspects of the national economy, including:
- Assistance in redevelopment of distressed retail and commercial properties
- Financing the construction or renovation of multi-unit and affordable housing
- Allows the business to move to larger facilities while maintaining its capital in the business
- Let the middle class build a real estate portfolio that will one day fund retirement.
- Support for farmers, ranchers and forest owners
- Promoting land conservation and environmental protection
The rebirth of our economy will have to come from many sources, and the private sector will again have a significant role to play in the recovery. The best way to stimulate improvements and strengthen this infrastructure is to leave section 1031 unchanged to stimulate investment and, most importantly, reinvestment in the real estate economy.
Manuel Ramirez – Chairman RJI CPA and one of the founders of the firm in Irvine. He was appointed by Governor Arnold Schwarzenegger to the California Board of Accountancy in 2007 and was elected President of the California Board of Accountancy in 2010.
Daniel Wagner – Senior Vice President, Government Relations Inland Real Estate Group of Companies… He is the former president of the Chicago Realtors Association.