1031 exchange repeal
Saw that the crazy sob Biden is really talking about revamping the 1031. I had doubts that it would go through but on the off chance it does, what could the repercussions be? I've never even heard of anyone doing one.
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They're definitely used, but I'm not personally a fan of the 1031 exchange as it is implemented in the U.S. It has a bunch of arbitrary rules, timelines, and procedures that make it inorganically difficult to pull off. It's so complicated that it's created an industry just for consultants. I'd abolish it and start over with rules made by Congress rather than by IRS rulings and letters and judicial rulings.
I should elaborate. I guess I was alluding to the volume of 1031 transactions in a given yr. Is it really that many that it shuts down middle-market transactions?
Yeah it's not that widely used. Shows up in the search engine, but a UF study from 2015 says it's about 6% of CRE volume which feels about right from my experience.
EDIT: Y'all can keep MSing me, but I'm factually correct. It's not a significant source of real estate volume. Sorry, outside of your little market bubble that you work in, outside in the real world it's not going to move the dial.
Not in the slightest it supports an entire economy of real estate professionals. There are thousands of 1031 exchanges per year and they make up around 60% of all net lease transactions.
Nearly every middle market purchase I've worked on involved a 1031 by at least one of the parties.
It's extremely common but won't hurt the institutions as bad as it'll hurt the mid market operators
This is exactly my point. A tax rule shouldn't create a cottage industry. Tax rules should be logical, consistent, and for the purpose of raising revenue. "60% of net lease transactions" is a drop in the bucket of CRE transactions.
call me crazy, but investment decisions shouldn't be made on their tax merits, they should be made on their investment merits. I say good. you can't carry capital gains over on business sales, why should RE be favored?
I don't like a lot of things about Biden's plans, this is an exception. LESS LOOPHOLES
People made a lot of money before 1031. People will make a lot of money after 1031.
Current material cost is far more of an impediment than any potential removal of preferential tax treatments.
Yea but it's been around since 1921, right? Like how many guys were just real estate millionaires back then?
I think this should help normalize values of certain asset classes in certain location. By way of example, whenever I was buying multi in NYC, some fucking asshole would come through and win the deal on like a 3.5% cap - they didn't give a shit because they were just trying to 1031 into something to avoid the tax. Inflated values on assets to retarded levels. Apparnently NNN leased Arbys per the poster above went through the same problem LOL.
I was talking about that earlier this week. Like theoretically, wouldn't it inflate values?
100% - they could afford a lower cap because net of the tax consequence its worth it to them
There are two arguments to 1031 in our industry. One is that its inflated values, but the other is it will reduce transaction activity. For example, our firm has one legacy property. It does well, but have owned it for so long that its been fully depreciated. We're planning to sell, but reality is we want to do a 1031 given the tax consequence is so large. However, if they remove the 1031 exchange, we'll never sell because the property does well enough that it would be pointless to pay the massive cap gains on it.
In a case like this, these properties would never change hands and would fall into disrepair. This is the biggest reason why I don't think it will go through.
delete - thought this was in response to my comment
This is exactly why we shouldn't have depreciation as a tax-deductible expense. It creates perverse incentives on the back-end for property owners to not sell. Tax laws ideally should be for the purpose of raising revenue and shouldn't radically change investment decisions.
Guys talking like this kills the industry.
Ask a better question:
What's the best way to replace the 1031?
I mean, the entire concept is a giant giveaway that doesn't really add any value. It's a way to shelter gains. The question, as with any tax loophole, isn't why we should get rid of it, but why we should keep it.
So if it goes away, what incentive would a legacy property owner have to sell if their cost basis is really low? Would they just do a refi?
Maybe they'd like to cash out. Maybe they're tired of the management of the asset. I know plenty of owners in NYC who are selling because 30 years of dealing with the grind is too much, and they want to retire somewhere warm with their capital gains.
Again, the question shouldn't be "what is the incentive to sell" but "why do we need to incentivize a sale in the first place"? If they're managing the asset well, why should they need to sell? The government doesn't need to be involved in creating velocity in the real estate market. 1031 exchanges provide no value aside from being a tax shelter. At least with depreciation there is a theoretical underpinning for it.
Fair points. Like I said earlier, I've never heard of anyone using them but I can see the argument from both sides.
100% agree. the fact that government favors certain types of investments over others flies in the face of a truly free market. I say go further. eliminate depreciation, eliminate the 1031, eliminate carried interest. if an investment cannot stand on its own legs because of its fundamental merits, then so be it. why should someone who sells his business and then starts another one pay higher taxes than someone who sells a building and buys another building?
and for those of you who threw MS at me on the first one, I'm open to hearing rebuttals, I'm having a hard time coming up with them because I see the removal of this as a step towards a freer market (regardless of all of the other bullshit Biden's trying to pull)
What's the theoretical underpinning for depreciation?
lol. Yes, Joe Biden single handedly destroyed the entire industry. We're all now out of work. RIP.
if an industry can't survive without tax perks, that industry deserves to be gutted
I'm on board with eliminating 1031s. Shouldnt the market dictate when its time to sell not some goverment induced tax status?
I'm just excited for the fact that NNN retail will start trading at reasonable cap rates again.
Lot less 1031 love on this board than I expected. I agree this wouldn't be a death sentence for our industry - but there are definitely some implication/second order consequences. I think that it is likely to reduce liquidity - there are a lot of deals that wouldn't happen if there was a 50% tax bill waiting on the seller. Maybe I'm drinking the KoolAid - but there is a public good of developers acquiring obsolete and/or underutilized real estate and improving it to meet what market needs. Adding more friction to these transactions is an impediment to redevelopment and improvement of blighted projects/areas. For public REITs, 1031s essentially allow the company to retain and reinvest capital upon sale of an appreciated asset. If 1031 is gone, REITs would have to distribute the gains on sales of assets, effectively shrinking the company - which may cause many of these transactions to not happen.
Just my 2 cents.
Maybe they find someway to include those blighted properties in QOZ and treat those kind of like 1031s. Idk. Still early so no telling what happens or if 1031 is even repealed.
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