With a new man in office and a string of strategies to “Make America Great Again,” it’s fair to say that many these days are sitting at the edge of their seats to see what comes next — it’s especially true for Commercial Real Estate (CRE) investors, who are on the cusp of losing the much-admired 1031 exchange due to Republican-led tax reform.
Just as a reminder, the Internal Revenue Service (IRS) permits owners of business or investment property to participate in the 1031 exchange (a.k.a. the like-kind exchange). In short, qualified participants are able to defer state and federal capital gains taxes if they sell their property and swap it with another of the same kind that carries the same nature, character or class.
According to CNBC, 63 percent of realtors surveyed by the National Association of Realtors said they had participated in the 1031 exchange over the past four years. Additionally, about 40 percent said the exchange was crucial to the transaction taking place.
Still in its infancy, the new presidential administration led by Donald Trump is working in-hand with the Republican-led Congress to forge a path for comprehensive tax reform that’s designed to slash corporate taxes and boost stimulus. Trump and his administration released a tax plan in April and called it the “biggest tax cut” in U.S. history. As congress continues to refine the plan, Trump is preparing for a tough fight.
Despite questions remaining about the reform, rumor has it the administration favors eliminating the decades-old provision from the tax code as a method of creating fiscal stimulus. Based on a 2014 estimate from Congress’ Joint Committee on Taxation, a repeal would generate $40 billion over ten years.
“There will be a big decrease in transactions which would negatively affect many U.S. taxpayers and result in fewer jobs in ancillary services involved in a sale/purchase like title companies, lawyers, lenders, banks, mortgage brokers, environmental companies, real estate agents/brokers and even reduced income to municipalities from less transfer tax revenue,” said Scott Saunders with Asset Preservation about the elimination of the exchange. Ultimately, a repeal, cap or restriction on the 1031 will have a lasting impact on multiple industries that utilize the exchange, Saunders said.
To counter, Jonathan McGuire a CPA with Aldrich CPAs and Advisors LLP said, “With the proposed changes, the repeal of section 1031 would effectively not be felt. The proposed immediate write-off of all buildings in the year of purchase, an investor could sell a building and use the proceeds to purchase a new building of equal or greater value.”
Stay tuned for more details about the fate of the 1031 exchange by following our 1031 exchange series online.