So... it is going to be over? Will 1031 drop to $500k max? Yuk!

34 Replies

I'm not sweating it. Biden is throwing everything against the wall to see what sticks but there are still a lot of people between him and success. It would be a major hit to the real estate market and economy and I think there are enough smart people to stop it.

Originally posted by @Nathan G. :

I'm not sweating it. Biden is throwing everything against the wall to see what sticks but there are still a lot of people between him and success. It would be a major hit to the real estate market and economy and I think there are enough smart people to stop it.

I had a meeting last week with my accountant here in liberal tax you to hell Oregon.. and he thought these proposals had about zero chance of actually passing.. he mentioned that many Democrats also do 1031 and want stepped up basis etc etc.. 

 

i live in the 5th most expensive market in the country and Ive never had a gain over $500k.  This will not affect most people who invest in residential real estate. It would primarily affect those in commercial.

Originally posted by @Russell Brazil :

i live in the 5th most expensive market in the country and Ive never had a gain over $500k.  This will not affect most people who invest in residential real estate. It would primarily affect those in commercial.

where it will affect those in SFRs are the real high equity markets like the bay area seattle LA and PDX to an extent.

it will take away the option to get your tax free 500k AND your ability to rent the home then do a 1031 on the remainder 500k or 1mil or 2 million equity you have..  

 

Originally posted by @Russell Brazil :

i live in the 5th most expensive market in the country and Ive never had a gain over $500k.  This will not affect most people who invest in residential real estate. It would primarily affect those in commercial.

PS Pelosi and her family are very big into real estate this would affect them deeply  :)

 

Originally posted by @Russell Brazil :

i live in the 5th most expensive market in the country and Ive never had a gain over $500k.  This will not affect most people who invest in residential real estate. It would primarily affect those in commercial.

I was talking to one syndicator of MF and his thought was it could preclude those in 1031 from paying stupid prices for MF was his comment or I suspect current syndications were proformas were an exit at a very low cap rate to achieve the proforma return ??? 

Lets just go with a flat tax like Steve Forbes wanted .. thats the best.. LOL  10% to everyone .. even playing field. 

 

Originally posted by @Jay Hinrichs :
Originally posted by @Russell Brazil:

i live in the 5th most expensive market in the country and Ive never had a gain over $500k.  This will not affect most people who invest in residential real estate. It would primarily affect those in commercial.

I was talking to one syndicator of MF and his thought was it could preclude those in 1031 from paying stupid prices for MF was his comment or I suspect current syndications were proformas were an exit at a very low cap rate to achieve the proforma return ??? 

Lets just go with a flat tax like Steve Forbes wanted .. thats the best.. LOL  10% to everyone .. even playing field. 

 

A flat tax system would at least be more fair than the current bell curve we currently have. And I benefit from that bell curve paying drastically lower rates than the middle of that curve. 

 

Seems like that would mostly hurt trading of MF properties or perhaps in high cost markets like SF, NYC and LA.

So this seems like it would only affect those in expensive MF/commercial markets, which is a fraction of the total number of real estate investors out there. Besides, the 1031 is a tax deferment, not a write-off. We will still need to pay our fair share and it's the cost of doing business. Also, it would still need to go through congress and Washington is in gridlock for the next year and a half at least.

I have not read the proposal but when they say $500k in profit I assume they mean all the 1031s together.

Example

I buy a property for $200k and sell it for $500k. I am good because the profit is $300k. Now I roll all the proceeds from the sale into a $1m building. That building is worth $1.5m now when I go to do my second 1031 exchange. So my profit from the second transaction is $500k Making my total profit from both 1031s $800k.

I don’t know why anyone would think it is a good idea to get rid of the 1031. It allows investors to continue to leverage their money. For the community it gives an incentive for property owners to sell their property. That puts tons of money in the local economy. It also helps improve the area when the new buyer renovates the building.

I'm surprised that there is a single person here that is even remotely in favor of seeing this pass.

The fella that said he hopes it passes because he doesn't want to be out-bid by 1031'ers. Har-Har... perhaps one day you'll be a 1031'er. ;)

Also... remember... you'll appreciate that "out bid" when you're on the selling side. ;) 

@Jaime Mack

Man who is worried about having his $500,000 tax free gift from the government reduced has the nerve to call other people who presumably don’t have to worry about $500,000 profits in real estate “takers.” I should send this to The Onion

Even if they pass it which I doubt we still have the government manipulating things in our favor via inflation, that is something they can’t possibly stop.   They can take away some of the IRS tax advantages as long as they are willing to crank up the money printing!  Which will transfer more wealth to real estate investors from the poor and middle class then the 1031 ever could.

The basis of the 1031 exchange affects the tax on the sale of an asset. So what this would do is de-incentivize selling assets and plowing the proceeds into new assets with value-add opportunities. Take those away and what is the result?

1) Less asset sales meaning the government would get LESS tax income, therefore shooting themselves in the foot. If they did a little bit of research, they would see that 88% of investors end up paying the tax deferrals at some point down the line. So there's really no need for this.

2) Investors will have less profit margin for value add opportunities. Since the numbers are going to be skinnier to play with, investors might go with lower quality finishes, or not bypass certain renovations in order to hit numbers.

So the total end result is less valuable properties and less taxes gained by the government. Because of its back asswards-ness, and the way this country is going... it's likely to pass lol

I'm surprised that this was just brought up now. Thanks for starting the conversation. For those who says "it's only 500k cap, way above my profit", do you project your earnings never pass 500k? Plus, they set it at 500k now, they can easily decrease that bar lower to 400k, 300k, 200k, then boom, no more 1031 exchange... just some thoughts here, and hoping it won't happen.

Originally posted by @Darren Budahn :

@Jaime Mack

Man who is worried about having his $500,000 tax free gift from the government reduced has the nerve to call other people who presumably don’t have to worry about $500,000 profits in real estate “takers.” I should send this to The Onion

the owner occ married 500k tax free is not being talked about that is still there. 

 

I doubt it passes. Plenty of real estate investors in Congress (including Democrats), and plenty of sizable donors to the party in most of the country who are landlords, some very big ones. I doubt they do it. I do think some of the other tax changes will pass. 

If it does pass, or some version of limiting the 1031 amount, it will cause two big things IMO: 

1 - Less selling of MF and commercial property. 

2 - More new construction through Opportunity Zone Funds. Even though investors only have the option of keeping their capital gains in for 10 years now...its a way better option for them than paying 40% capital gains tax. Especially since ANY TYPE of capital gains tax can go into a OZF (vs only like-kind transactions of a 1031) and come out with zero taxes after 10 years. Though sales will stall out a bit, it would bring a lot of new real estate on the market at the same time. Which is a good thing in the long run. 

I'm torn on the proposal. The developer side in me say this is a great catalyst to push people into OZF for developing. The other side of me says this would be horrible and stall out and crash the commercial market. Plus this is a huge problem for those wanting to cash out and retire. I can ride out this wave....but most retirees dont want to wait 10 more years to see their money or be limited in any cash flow because they cant get rid of properties without taking a huge hit. There are also changes to estate & death taxes as well....those will more than likely happen IMO. 

@Gagan Mehta , both you and @Jay Hinrichs are correct.  You do have to sell in order to get your $500K exemption for your primary residence.  The mechanism to do both the 1301 and the121 (if you have more than $500K of gain) is to live in your primary for a couple of years and then move out and rent it.  When you sell you meet the primary residence requirements.  And because it is now being used as investment the rest of the gain can be sheltered in a 1031 exchange.

Come to think of it - This is going into the play book if the proposed changes take place.  Buy really nice rentals and live in them for a couple years before renting. Then rent for a. year and sell.  You'll get up to $500 of gain tax deferred in the 1031.  But will also get up to another $500K tax free!!!!

Or buy an upscale duplex or quad (how bout a Brooklyn brownstone 2 family???). When you sell you get your primary res side tax free and you can 1031 the rest so again you can take more than $500k of gain tax free

So landlords can buy small properties and spread out the $500K of gain over multiple sale.  Or folks with money can use the primary exemption to mitigate.

Once again proving that the phrase "I'm from the government.  I'm here to help".  Should scare you to death!