1031 Exchange in danger. Why aren't more people talking??

Question

savethe1031.org

The 1031 is one of the bedrock's of investing. Why isn't a network platform here of over 600,000 members in one voice telling representatives that they do not want a change to the 1031?

Mark Creason · Answer

Joel,

I agree.  Bigger Pockets should be providing more resources to protect the 1031 exchange.

Here is a list of members of the House Ways and Means committee.  If you live in one of their districts, call them to express support for the 1031.

HW&M COMMITTEE MEMBERS BY STATE

AZ: David Schweikert (R)

CA: Devin Nunes (R), Xavier Beccerra (D), Mike Thompson (D), Linda Sanchez (D)

CT: John Larson (D)

FL: Vern Buchanan (R), Carlos Curbelo (R)

KS: Lynn Jenkins (R)

GA: Tom Price (R) (will open up when Price becomes HHS Secretary), John Lewis (D)

IL: Peter Roskam (R), Danny Davis (D)

IN: Jackie Walorski (R)

OH: Pat Tiberi (R), Jim Renacci (R)

OR: Earl Blumenauer (D)

PA: Mike Kelly (R), Pat Meehan (R)

MA: Richard Neal (D)

MI: Sander Levin (D-Ranking Member)

MN: Eric Paulsen (R)

NC: George Holding (R)

NJ: Bill Pascrell (D)

NE: Adrian Smith (R)

NY: Tom Reed (R), Joseph Crowley (D), Brian Higgin (D)likely added

SC: Tom Rice (R)

TX: Kevin Brady (R-Chair), Sam Johnson (R), Kenny Marchant(R), Lloyd Doggett (D)

TN: Diane Black (R)

WA: David Reichert (R)

WI: Ron Kind (D)

Jay Hinrichs · Answer

@Chris Martin  could be that average American will never do one and see s it as a tax loop hole for the rich.. and could care less if it went away...

with 15% tax I personally would be inclined to pay the tax so I was not boxed into quick decisions like you I might want to buy something completely different or nothing at all

Mark Creason · Answer

Chris,

Lets say Trump actually does reduce the tax rates.  After the 1031 is eliminated, do you think Trump will be President for the rest of history.

In 1981, Reagan gave us one of our history's biggest tax cuts.  In 1986, he took it away as the deficit was growing at a massive rate.  In 1986, they changed the way real estate is taxed.  They eliminated most of the passive losses available and changed the depreciation method.  These changes led to dramatic losses in real estate value.  After which, we had the Savings and Loan Scandal and S & L bailout.

I like the status quo.  The 1031 exchange has been around since 1921 and has created significant wealth for Americans.

Mark

Chris Martin · Answer

I am not against 1031 exchanges. But that site... man, too much! They must think Americans are so dumb as to think the homeowner Section 121 exclusion is really the 1031 exchange! They say "...Repealing the 1031 exchange would cause a significant reduction in residential real estate demand, which would lead to a collapse in home prices. This would cause millions of borrowers to lose trillions of aggregate equity and would cause millions to go back under water on their mortgage."

I'm Ok with going to talk to George Holding, Rep. NC, if he is approachable. Never talked to him... can I get 5 minutes face time? Does anyone know? I have a 9 figure(*) exchange potential going on and all alternatives are important. But here's the rub....

If Trump does what he says and cuts taxes "significantly" then I'll pay the smaller capital gains and depreciation recapture (DR) taxes and NOT do a 1031. The 1031 REQUIRES me to buy like-kind real estate in a market I feel uncomfortable buying in. I like to select when I buy and sell, and the government makes me BUY in X days at the top of the cycle. Crazy. That's a regulation(the X day time limit) I'll submit to Trump to eliminate!

If LTCG and DR taxes are lowered significantly, 1031 may become irrelevant.

As a contrarian investor, I'd rather park money elsewhere (e.g. in buying a distressed company or even (...cough...) near-cash) and wait for a better cycle rather than buy at the top.

(*) Yes, I still count the cents column... so 9 is 7 in $, 5 is 3 in $, etc.

Mark Creason · Answer

Chris,

The House Ways and Means Committee has elimination of the 1031 exchange in their budget bill.  The bill is looking to slightly lower tax rates, but they are trying to keep it revenue neutral.  They are assuming that they will be able to make 100 billion a year from elimination of the exchange, but this assumes that volume stays the same.  If people are not selling to avoid taxes, what will happen to pricing of real estate.  The winners will be billionaires whereas regular middle class real estate investors will suffer.

Mark

Chelle Knijnenburg · Answer

I did a bit of research.

The site 1031corp explains all the ways the elimination of 1031 affects us, down to public transportation costs, airline costs, and more. There is a link here to contact your representative.

Cooper Bert · Answer

@Jay Hinrichs - I believe your point is spot on and why there is not further outcry from the "investing" community.  I’m with you on taking the hit at 15%.  That allows me to make re-investment decisions based solely on the re-investment deal.  I believe that the greatest trap to overpay for RE is to avoid paying cap gains taxes.  I assume that I will be paying the 15% and if I have a 1031 deal in my back pocket that makes sense on a stand-alone basis … bonus tax deferral!

IMHO - The problem with 1031 potentially going away is not the 1031, it's Ordinary Income!  If you can eliminate ordinary income, you are already at 15% now.

Remember that there are two categories of personal “investors" that use 1031:

1) The "Professional Investor" who does investing in RE or multi-faceted, diversified investments.  This investor derives income from passive sources and investing is the “day job”

2) The “Working Investor” (for lack of a better term) who has ordinary income from a day job and/or has ordinary income from a spouse.  This investor has supplemental income from passive investments that can be larger than their full-time ordinary income (a.k.a. the much-sought-after-but-rarely-achieved “financial freedom”).

Institutional Investors are too worried about Carried Interest going away to pay attention to yet another threat about 1031 roll-overs.

BP has done a great job alerting all levels of RE investors of the advantages of “tax-free” RE investing.  What is still lacking is an explanation of the further steps to the “tax free” living strategies of Professional Investors.  “Financial Freedom” can be achieved with about half the gross income if that income is tax-free or tax-deferred.

“It’s not how much you make, it’s how much you keep.”

Also, my simple explanation above doesn’t even include the benefits of Depreciation and Amortization which further help defer RE tax BUT present a huge tax problem with the whole recapturing thing!!  That’s when you realize that “tax deferred” does not mean “tax free”!

Final postscript for the wonky in the crowd – A much bigger deal to Professional Investors will be the FED increase in interest rates, not mortgage rates or 1031.  With easy money rates close to the true inflation rate, many PIs follow the lead of Google, Microsoft, Apple, etc.  They leverage their cash flow with borrowed funds at Prime or below (<=3.75%) while reinvesting potential positive cash flows ….  and Voila! … no ordinary income and a cash neutral interest deduction to boot!  YMMV

Chris Martin · Answer

@Mark Creason

Thanks for the response. Not that facts matter, but I would encourage you to tell Kevin Hardy what the IRS published as statistics for Form 8824 Data for Tax Year 2013 (the latest available to the public) which shows (in $ thousands, three columns: Individuals, Corporations, Partnerships): ...Realized gain (or loss) (line 19)     9,137,786    40,391,959    29,015,220...

That's about $78.5B realized gain, and at the 15% tong term capital gains tax rate, that's a less than $12B real tax impact. For individual returns, it's only $1.3B.

If "They are assuming that they will be able to make 100 billion a year from elimination of the exchange" then they should know the IRS facts. I hope you told him that the individual's 1031 exchanges are in reality about 1% of the number they are assuming.

Mark Creason · Answer

I got it straight from Kevin Hardy's mouth.  Kevin is committee chairman for the House Ways and Means committee.

Mark

Chris Martin · Answer

@Mark Creason Here is the search I am using. From the HW&M site, using the search box, covering current and past sessions.

https://www.congress.gov/committee/house-ways-and-means/hswm00?q={"search":["1031","exchange"],"within":["1031","exchange","1031"]}&searchResultViewType=expanded&pageSort=latestAction:desc

I don't see any text that eliminates 1031 exchanges. I've tried "1031" and "exchange". Help me out and post how you found the budget bill with elimination of the 1031.

1031 Exchange in danger. Why aren't more people talking??

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