His budget proposal would cap to $500k in capital gains deferment. With Dems controlling both sides, do you think this passes? Or will some Dems try to get it taken out. Mid terms are approaching and I think we wants to make one last shot at getting something passed.
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No. The voter base does not care either way. The average person is paying $4.50+ at the pump. The last thing they want to hear is a politician talk about some random tax advantage. Also, the vast majority of wealthy donors, on both sides, will be against it (maybe not publicly). Realistically the only reason people for a moment cared about 1031 is because it is related to real estate and consequently Trump.
I love how people discuss gas prices as if gas wasn't often much more expensive than it's been the last couple years. We talked about plenty of tax breaks when gas prices were 3.50 a gallon, why not now?
They keep coming after this. My guess is no. Too many rich people on both sides of the isle. Idiotic to consider, as 1031 provides liquidity and incentive to sell appreciated properties in the market.
But why is this a good thing? If you're going to have a tax break, it should provide some theoretical positive. Depreciation is meant to reflect the fact that equipment ages and becomes obsolete, for example. What good is the 1031 break doing? Merely making it easier to buy and sell buildings isn't a positive for anyone except the person deferring their taxes.
For what it's worth, getting rid of the 1031 exchange would hurt me personally, both directly and indirectly, but I still don't think there is a compelling reason to keep it.
One of the several reason I like. Is that if you take an asset hold long term, do the 20-30 years of R&M, CAPEX, etc and your property appreciates, you can sell it to someone who is going to pay more to renovate the building. I've had the scenario where it has been financially accretive for a family who has owned for a long time to sell, whereas if they had to pay taxes, they would just sit and hold the building and not put money into renovating.
So... slumlords.
In other words, they'll put no money in, rents will go down or violations and lawsuits will go up, and they won't be able to cover debt service.
Basically, it sounds like you're arguing that we should keep the tax break in order to help shitty landlords make more money. Someone who is putting money into the building all the way through has an asset with a higher value, and thus will get more value on a sale.
I think that's jumping to conclusions. What is dated housing? that I already outline has had work done to it via R&M and CAPEX. Loss to lease is a metric for a reason. Large funds shouldn't be the only ones to operate in the CRE space, because they can update a property every 5-7 years.
I'm talking to owners of class C, B real estate. Who purchased when the market(geography) was likely not as good, but proceeded to renovate the building at great risk.
This is why you fund a reserve. Also, if you cannot afford to keep up a building, sell it. Take your profit and move on.
This particular justification for 1031 exchanges is basically just an argument to keep prices artificially inflated so that less capable landlords can still make profits despite not actually managing their buildings well. Whether that's because of greed or a lack of financial ability to execute on repairs is almost immaterial. I'd argue that the government should not be in the business of guaranteeing landlords a profit.
OK, and? So I bought in a not so hot area 10 years ago, put some money into the building.... and now I need someone to artificially juice my profits, because why? If the area has experienced gentrification and rent growth, then I can refinance my building on the basis of a higher value and put some of the proceeds into repairs. Or I can sell for an inflated price. Theoretically I am selling the value of the improvements I did, as well as the market appreciation. Where in all of that do I deserve a tax break merely for selling the asset?
Maybe I'm just an idiot, but nowhere in your post did I see a good reason why someone exiting a property deserves privileged tax treatment. I can see the argument for why someone buying and investing in repairs should be given a break, but when you get that treatment on exit, all you are doing is incentivizing people to keep rolling their money into new assets, neglecting those, and moving on without their basis stepping up.
While I don't disagree with some of your points about government intervention in real estate. One could argue you are about 70 years too late.
I'd like to walk you back through what you have said, more specifically to about how you tell owners how to operate their properties. As you know there are different GPs and capital allocators. the argument you make that if you don't have the money to "fix up" the building, then don't be in real estate. Is well, patronizing, and given from an ivory tower. In reality there are firms that specialize in opportunistic, value-add, core plus, and core. I don't see you making a good argument to a firm that specializes in say core to start investing in opportunistic. But this happens all the time, REIT's and Funds buy core for yield, but as properties get old they get dated. Then you have value-add where they buy those "old" properties and for higher yield "fix" them up with capital.
Now your "slum lord", for some reason you don't think that mom and pops and the small business owner can operate in this business without resorting to negligence, buys properties, maybe they bought them 20 years ago, fixed them up, has a reserve "fund", performs R&M, but doesn't go for the full gut renovation or Lefroy Brooks upgrade package. I see the 1031 as a great incentive for risk averse property owners to give younger operators, or neighborhoods the correct allocation of capital.
But, I can see both sides. Either the 1031 goes away, and there is little financial incentive to ever sell properties. On the plus side, it would lead to more affordable house in those neighborhoods where someone, before could buy a 30 units building and then gentrify the neighborhood.
Oh, I'm sure. But what is convenient or what is possible shouldn't distract us from what is right. Many laws we take for granted are really just dispensations bought by special interest groups; no reason not to take them off the books. Antiquity does not equate to sanctity.
That is not what I said. What I said is that if you do not have the money to operate and maintain a building properly, your physical plant will decline until you can no longer achieve rents to cover your costs, at which point you'll sell to someone who is capitalized to repair the asset such that they can capture market or near-market rents.
Right. And your "core" fund is buying expecting a 5 or 6% yield (or whatever). Ten years down the line, their spit and polish approach to building maintenance, along with time itself, means their formerly Class A asset is now Class B, and charging rents below market. So yields are down. The argument you seem to be making is that without the 1031 tax break, no one would ever realize a gain and sell the asset at this point, which seems crazy to me. Prices would go down, yes, and people who own at the moment who expected to be able to roll over into a 1031 Exchange get fucked, but after one capital event the market resets and prices come into alignment with the new tax regime.
Your description of how an asset changes hands, and into whose, is accurate... but doesn't actually constitute a defense of the 1031 tax break.
Plenty of slum lords are backed by institutional capital. Plenty of mom and pop owners can operate spotless buildings. I don't see where I said that single-asset owners can't be responsible. There is maybe an argument that being less well capitalized in general, they'll be more likely to let a building slide into ruin from sheer inability to raise the money.
See, you're making this jump without actually showing how you get there. Why does the 1031 give neighborhoods the correct allocation of capital? There is no intrinsic reason we should be giving "younger operators" a golden parachute to get out of a business venture in which they failed.
All the 1031 break does is prop up property values. That's it. You can make an argument that by getting rid of it, you make ownership of single assets or small portfolios more accessible to independent investors (e.g. an owner-occupied building), since it'll bring pricing down significantly.
What?
Look, I trust I'm not of substandard intelligence, but I really haven't spotted what it is that the 1031 exemption is doing that has any social utility. It doesn't help tenants because it doesn't actually incentivize anyone to invest in physical plant repairs. It doesn't really encourage small business owners to enter real estate (whether that should be a policy objective is another question), because it keeps prices artificially inflated. The only argument is that a lot of people have invested in real estate on the assumption that whenever they're done managing their asset, they get a free pass from the IRS to reinvest those dollars. And while I have sympathy for those people (and that includes me, for what that's worth), that is in no way, shape, or form an argument against 1031. Regulatory and legislative risk is part of the game; if you aren't accounting for that in your underwriting, your loss is on no one but you.
Appreciate all your counterpoints, comments.
If I'm going to respond to one comment that I'm not sure I 50% agree with is "propping up" values. Clearly you are referring to someone buying a 3-4 cap who is in a 1031x, where it doesn't pencil to outright buy the property with 75% debt(max leverage). I think where 1031 greases the wheels is on the sale value, and not the purchase value of the 1031x. Let's say the property is due for renovation, because it is at the end of a 7-10 year cycle where the countertops and cabinets are stale. My options are sell it or renovate it. Well if I look at a NPV analysis and from a risk rating standpoint, with 1031 it makes sense to sell a value-add property to gain arbitrage in cash flow to a 3-4 cap, and not only that you gain a higher return on a risk rating spectrum by having stabilized cash flow. You take away that arbitrage, and owners will sit on their properties, yes maybe upgrade, cash-out, and buy new ones, but why not sit at a comfortable risk rating and return where you have loss to lease to cushion a market downturn? If the 1031x goes away it would take a higher bid to entice me to sell the property if I can't get the same income stream or higher. Ergo, higher prices if the 1031x goes away.
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