Danger Lurking in Biden Plan to Eliminate or Cap 1031s
Linda Gerchick and Daniel Wagner
The strength and resilience of the commercial real estate market has been tested many times over the last 100 years – never more so than during these past 16 months as the COVID-19 pandemic shuttered countless retail centers, restaurants, hotels and office buildings. The fallout continues. It is estimated that up to 25% of the strip shopping centers will go bankrupt. Virtual meetings will permanently replace significant business travel, and many people will work from home exclusively.
As every state in the nation, Arizona especially, begins to creep towards an economic rebound, commercial real estate must again play an essential role in that recovery. The Biden plan to eliminate the ability to defer taxes on property gains over $500,000 from like-kind exchanges of real estate, which is granted under Section 1031 of the Internal Revenue Code, will cripple commercial redevelopment at a time when our communities need that investment more than ever.
Section 1031 provides important capital to revitalize communities throughout the Phoenix area and grow our economy. It has been used to provide affordable multifamily housing in working class communities, revitalize commercial shopping centers and allow growing businesses to expand their space.
The Federation of Accommodators, the national organization of 1031 Exchange companies, analyzed and aggregated the data for the State of Arizona from seven companies in Arizona from 2015 to 2019 and found there were 14,000 properties involved in exchanges with a total value of $23.4 billion.
This is just a portion of the Arizona market as there are many more companies that facilitate exchanges, but it is clear that Section 1031 is important to the real estate economy and that it generates significant tax revenue for state and local governments.
An all-too-common misconception, and one which has often fueled attempts to remove the provision, is that 1031 exchanges are a loophole to avoid the payment of taxes. That is not the case. 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, rather than a subsequent exchange, with all of the deferred taxes getting paid within roughly a 15-year window.
Additionally, a macroeconomic study initiated by Ernst & Young in 2017, and recently updated, concluded that if section 1031 were limited or repealed, it would shrink GDP by a whopping $9.3 billion per year. It further examined the potential benefits from the use of 1031 exchanges for the coming year and concluded that transactions from section 1031 exchanges will create an estimated 568,000 new jobs (260,000 in businesses using 1031, and another 308,000 from suppliers to those businesses), generating $27.5 billion in labor income which in turn will generate $55 billion value added to the GDP, and $14 billion paid in federal, state and local taxes. That $14 billion generated in one year far exceeds the estimate in the 2021 Biden budget that says capping 1031 at $500,000 raises on average of $1.95 billion per year over 10 years. Why would anyone change Section 1031? It doesn’t raise any money.
Clearly the benefits gained by the national – as well as local – economies from 1031 exchanges far exceed the assumed cost to the Treasury from these temporary tax deferrals – with ‘deferral’ being the operative word.
In the end, the Treasury receives its money; state and local entities enjoy the annual increased taxes generated by the healthy redevelopment of commercial property; and the local and regional economy is strengthened through the creation and retention of jobs.
Eliminating or capping 1031 exchanges – which serve as an essential generator of economic redevelopment, jobs, and local tax revenue for Phoenix and other cities and counties across Arizona – would fall far short as an expected source to pay for the American Families Plan, and ultimately have the unintended consequence of harming, not helping, our towns, our cities, and our American families who have struggled mightily from the ravages of the pandemic.
Linda Gerchick, CCIM a specialist in income producing properties, owns Gerchick Real Estate in Scottsdale. She is a repeat recipient of the Phoenix Board of Realtor’s Presidential Award.
Daniel Wagner is Senior Vice President of Government Relations for The Inland Real Estate Group of Companies. He is past president of the Chicago Association of REALTORS®.
I have a saying that I use, “I don’t disappear at the Close of Escrow.” My clients know this and depend on me to help make their investments successful.
The Close of Escrow is simply the beginning. Many agents collect their checks and disappear. Technically at the Close of Escrow, the agent’s duties are done, EXCEPT for confidentiality. NOT ME!
I primarily work in the mutli-family space, There is the transition of the building along with the transition of the tenants. I wanted to help the client understand only a fraction of the items that I help to facilitate after the Close of Escrow.
At closing and if not before, I want to make sure that the new property manager has not only all of the leases but ALL of the tenant’s contact information. This includes their email if possible.
The Tenant’s move-in checklist as well as the tenant application. Please remember that it is illegal for the previous owner to provide the Tenant’s credit report.
I also place in the original contract that the Seller will provide LABELED keys-even to the mailboxes, laundry, storage and vending machines. Once I received a box of keys to a 100 unit property with NO labels. What a mess.
The Property Manager will need the entity documents and a copy of the final settlement sheet. I provide all of this information. They need this to do the utility transfers and laundry lease transfer as well.
The security deposits are not owned by the new owner but rather are held in trust for the tenant until they vacate the property. Only then may the Owner take possession of the deposits or disburse them. At close of escrow, I have the seller transfer these to the Buyer. On the same settlement sheet, the deposits are then transferred to the new property manager. This way it definitely shows the in and out of the deposits and where they are kept.
If there are repairs to be done to the property, or if repairs have been made, I make sure that this is passed on to the property manager as well.
In the State of Arizona, ALL tenanted residential property must be registered with the state showing the legal name of the owner (entity or individual) and the name of the current property manager. If the owner changes the name or the property manager it is imperative that this be updated. The new property manager should do this automatically but ultimately it is the property owner’s responsibility to see that these things are done. The cost is minimal and it is a State Law.
Many times as I drive around, I drive past properties that I have sold. I really look at them. If I see something that is not correct or needs attention, I snap a photo and send an email to the owner and the property manager. As a rule, towards the end of the year, I take a photo of EVERY property that I have sold that year and send it to the Buyer. Perhaps the Buyers have not even seen their property recently.
Remember that every property is different and while these are only a few of the items that I do AFTER the closing, there are usually many other items that I attend to.
Most importantly, I still answer my phone and my clients have heard me say, “If there is a challenge, call me before I cannot help you. Even if it is months later.”.
Remember that I answer my phone and am available. I either will answer or return your call VERY timely. 602-688-9270
Have a really good day!
I, like so many others in this crazy environment that we live in today am really tired of hearing the same doom and gloom over and over. So my goal to you today is to put some positive thought there for you. Let’s start the New Year off with what we have and be Thankful. Let’s look around us and garner the good from the bad (even evil). Let’s focus on the goals that we have and accomplish something that makes us happy.
My son and his wife are teachers and while this has been a really difficult time for them, they have stayed focused on spending time with my two young grandchildren. This is time that they will not get back and they have not missed the time with the toddlers.
How many times has someone told you to “Follow your passion”? Advice around this topic is given ALL the time. Today, I wanted to explore this advice and maybe dispel some lies and add a little clarity around what passion is.
First, people all the time say they don’t know what their passion is. The reality is most people do not find it, they cultivate it. Most people find something that is interesting and then simply works on whatever that is.
Second, I’m sure you have heard the phrase “Go big or go home.” I read Originals by Adam Grant and the research is completely different. Most people gradually ramp up and take small consistent steps on their interests over a long time. They don’t just quit their day jobs.
Third—Balance. Today, it is heard from a lot of young people that think they can have balance every day. Not true. A friend of mine has a GREAT book called The Fantastic Life. In this book are rules and Rule 18 of his book, The Fantastic Life, is Do Nothing in Moderation. Everyone wants to have clarity and focus so we can spend our most valuable asset, our time, on the most important things in our lives. Life is all about tradeoffs.
Make YOUR Fantastic Life happen!
Call me, I really do answer my phone. 602-688-9279