By Roger W. Bowlin
IRC 1031 exchanges have nearly a 100-year history as a part of the Internal Revenue Code. While tax-deferred exchanges have been available since 1921, their longevity does not make them immune from the current tax reform debate. President Trump has identified tax reform as one of the first-year legislative priorities, with a target date of August 2017. Currently, the best indication we have as to what direction this reform will go is the House Representatives’ “Tax Reform Blueprint” co-authored by Rep. Paul Ryan and Rep. Kevin Brady. The 35-page document outlines a potential reform approach and does not specifically address 1031 exchanges. However, the blueprint does stress simplification of the tax code throughout. It should be noted that there are many significant issues that must be addressed if tax reform is to occur by the target date of August 2017, including, but not limited to: addressing the funding gap resulting from failure to pass healthcare reform, gathering sufficient support for a border-adjustment tax, and coalition building in both chambers of congress.
Many policy and tax experts hold the opinion that tax-deferred exchanges are entirely defensible due to the fact that “no economic benefit” is received as a result of an exchange and thus no taxable event has occurred. Here, “economic benefit” is defined as either cash received or debt reduced, also known as “boot.” Undoubtedly, the real estate community will fight aggressively to ensure that this fact is recognized when assessing IRC 1031, however it is possible that other proposed changes will be sufficient to incentivize the real estate community to diminish their hard stance on protecting exchanges, such as those included below:
Reduction in long term capital gains tax.
Individual exemptions of capital gains, up to a dollar threshold.
Complete first year depreciation of buildings and capital expenditures, but not land.
Many of these benefits are favorable for the real estate development community, but perhaps less beneficial for owners and investors. There are several groups actively advocating on behalf of investment property owners in Washington DC such as the Real Estate Roundtable, the National Realtors Association and the Federation of Exchange Accommodators. To add substance behind the advocacy, two economic studies were commissioned in 2015 by these organizations. The first was performed by two professors, one from the University of Florida and the other from Syracuse University in which they assessed the impact of eliminating 1031 exchanges on real estate values. The second report was performed by Ernst & Young and assessed the impact of eliminating 1031 exchanges on the economy as a whole. If you are interested in reviewing either report, please email me at email@example.com and I will send you copies of both reports.
In conclusion, while the political climate is uncertain, there is an orchestrated effort advocating on behalf of investment property owners. Political risk and uncertainty is not a new phenomenon as it relates to real estate ownership. Navigating this risk is an area of focus at Real Estate Transition Solutions, LLC and we will gladly assist in addressing any concerns you may have.
Roger W. Bowlin, President of Real Estate Transition Solutions, LLC, provides exit strategy analysis, execution, income and equity replacement options for investment property owners. If you have questions relating to your investment property ownership, please email him at: RWBowlin@RE-Transition.com or call (206) 755-7068.
**This article was published in the June 2017 - RHAWA "Current" the monthly publication of the Washington Rental Housing Association.
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The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. R.W.Bowlin Investment Solutions is independent of CIS and CAM.