Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
The end of the 1031 exchange.... It's a statement that seems more fit on a sandwich board sign wandering a street corner right next to "the end is nigh" yet, here we are in a living reality where it was not only spoken, and part of a campaign promise, but a key aspect to a new Presidential administrations tax plan that out-right declared Real Estate Investors as a key target.
All politics aside, this post is to discuss two specific questions; 1st: how will the end of 1031 like-kind exchange effect yourself, business, operations etc. AND 2nd: what actions are you putting in place or planning to address such?
According to a study by the University of Florida and Syracuse University's Whiteman School of Management, 1031 exchanges account for 6% of ALL commercial real estate sales volume, to the tune of an estimated $2billion - $4billion in annual tax offsets. Another study analyzed CoStar data from Jan 2010 - June 2020 that found of the $3.4 Trillion in sales volume the number of 1031 exchanges likely range 10%-20%. The study also found that the median sale price of a property involved in a 1031 exchange in 2018 and 2019 was approximately just $500,000 which in the vast majority of markets in the nation is a most common to the small stand-alone investor vs big institutional investors.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
Until it happens, we're all just borrowing worry, although what did you think would happen? Years of blown budgets, raised debt limits, and deficit spending and they have to find the money somewhere. There is nothing more permanent than a temporary gov program, and god knows they aren't going to downsize. So they'll keep printing worthless money and find ways to squeeze whatever they can to pay the tab...and we'll keep grinding along until we run bankrupt.
There's always act 20/22 in Puerto Rico...seems like a nice place to invest, but speaking realistically, 1)1031's, while nice, can be a pain in the *** and 2)If you owe taxes, it isn't all bad...you're making money, right?
@James Hamling, yes it will certainly die. All politicians always keep all of their promises. (please note this is saracasm)
It may happen, it may not. If it does get removed it will hurt lots of businesses and stall out markets. I doubt the political will exists to get rid of it, and my money is on it not getting killed.
"I doubt the political will exists to get rid of it"
I don't know. last time Ds owned the world was 2009, however, the make-up of Congress has changed a lot since then. If Congress is D run, odds are new taxes are more likely than not.
Way too many things to fix, like climate change, bad schools, social injustice and inequities - And we've done so great on these up to now. These all need funding, plus they've discovered how easy it is top spend $1T at one shot now, so there's that.
@James Hamling, yes it will certainly die. All politicians always keep all of their promises. (please note this is saracasm)
It may happen, it may not. If it does get removed it will hurt lots of businesses and stall out markets. I doubt the political will exists to get rid of it, and my money is on it not getting killed.
Generally I would be right there with you in having strong doubts too campaign promises forming into actual actions, ALTHOUGH in this specific case it is far more than just a campaign promise. As I noted, termination of 1031 is a key component of the incoming administrations tax plan. It has been specifically discussed by members of that administration as a funding source for the tax plan, in addition to raising capital gains. Which is also a key aspect, to raise capital gains does little for revenue if means to defer exist, so in that it is almost necessary to eliminate the 1031 to capitalize on raising capital gains tax. Both of these actions have been detailed and reiterated in the incoming administration considerably.
Significant changes would need to occur to change this forecasted near future of the 1031 termination.
"I doubt the political will exists to get rid of it"
I don't know. last time Ds owned the world was 2009, however, the make-up of Congress has changed a lot since then. If Congress is D run, odds are new taxes are more likely than not.
Way too many things to fix, like climate change, bad schools, social injustice and inequities - And we've done so great on these up to now. These all need funding, plus they've discovered how easy it is top spend $1T at one shot now, so there's that.
I suggest doing some google searching or simply read this article (https://thediwire.com/biden-pr...) detailing the end of 1031 is not theory, nor talking point, heresy or conspiracy, it is a key component of the incoming administrations tax plan "The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce", that has a $775 BILLION cost to it, making it necessary to create funding for, such as raising capital gains and eliminating capital gains tax measures such as 1031.
I suggest also checking who controls which branch of Gov. as of this moment, as it stands as D across the board for incoming administration, making for a clear path for 2yrs to pass whatever D may desire, such as the new administrations tax plan.
In summary, it's all but certainty it's happening.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
James - Believe me, I'm not disagreeing with you, just trying to figure what will happen. With Obama, think he really didn't exploit his options, but the Congress now is getting a lot more aggressive on how much they can "fix" and you've got people like Schumer (the old guard) and Nancy (the VERY old guard) to ride herd. So who knows?
Dave Foster- Warn me when/where you're performing. The visual messes up my day already :) Already told my 1031 guy here he may have to sell a couple of his Porsches.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
7. I'll be dancing the 4-9 shift left stage.
You hit my bigger concern with step up basis. I am buy and hold and was planning on keeping the portfolio and passing it to my kids for both stock and property. When I die it will step up but if they remove that there are potentially huge tax consequences that will affect everyone. You mentioned the family farm which will go away as well as family business and land. When you die the sale of your house will be taxable to the kids from what you paid which could be huge. It may also just further generational wealth as it may make sense to just keep it in the family than to sell. Luckily everyone swings big on the campaign trail and gets more moderate when they get in, you can’t fix everything or what will you campaign on next time.
@Adam Martin, it will certainly encourage movements to keep the properties in the family through corporate structuring. I worry about keeping properties because many times the next generation just isn't into it. I've got one son whos an engineer and is convinced that the answer to an electrical problem is a bigger hammer! He doesn't want to manage properties and we don't want him to get killed with taxes from the inheritance (or doing electrical work).
"I doubt the political will exists to get rid of it"
I don't know. last time Ds owned the world was 2009, however, the make-up of Congress has changed a lot since then. If Congress is D run, odds are new taxes are more likely than not.
Way too many things to fix, like climate change, bad schools, social injustice and inequities - And we've done so great on these up to now. These all need funding, plus they've discovered how easy it is top spend $1T at one shot now, so there's that.
I suggest doing some google searching or simply read this article (https://thediwire.com/biden-pr...) detailing the end of 1031 is not theory, nor talking point, heresy or conspiracy, it is a key component of the incoming administrations tax plan "The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce", that has a $775 BILLION cost to it, making it necessary to create funding for, such as raising capital gains and eliminating capital gains tax measures such as 1031.
I suggest also checking who controls which branch of Gov. as of this moment, as it stands as D across the board for incoming administration, making for a clear path for 2yrs to pass whatever D may desire, such as the new administrations tax plan.
In summary, it's all but certainty it's happening.
Ok, so let's make a friendly wager $100. @Dave Foster can hold the money in escrow for us.
Once again I'll cite political will. NYC alone lost $1.2 BILLION in tax revenue from decreased sales activity in 2020 due to the pandemic. I don't see Congressmen & Women signing up to further hurt their tax bases from real estate transactions.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
7. I'll be dancing the 4-9 shift left stage.
Brilliant insight Dave, the market and on D politician who is an investor that is, not the table top dancing, lol.
That IS a great counter, despite removing 1031 being a key aspect of the tax plan, it would require D investors to "open a vein" as well, unless like you mentioned, there is a loophole for the 1%, yet again.....
Side note, love St Pete's, had many good times there. Will have to Pm to find out where to stop at with my wad-O-one's to help fund the "dancing", lol.
@Adam Martin, it will certainly encourage movements to keep the properties in the family through corporate structuring. I worry about keeping properties because many times the next generation just isn't into it.
So how will it affect the basis if you keep the prop in something like rights of survivorship like a trust? I guess it won't change how the basis is calculated and leave it at what is was acquired at?
BTW - I used to be an engineer. A hammer's a lot more useful than a computer at fixing some problems.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
7. I'll be dancing the 4-9 shift left stage.
You hit my bigger concern with step up basis. I am buy and hold and was planning on keeping the portfolio and passing it to my kids for both stock and property. When I die it will step up but if they remove that there are potentially huge tax consequences that will affect everyone. You mentioned the family farm which will go away as well as family business and land. When you die the sale of your house will be taxable to the kids from what you paid which could be huge. It may also just further generational wealth as it may make sense to just keep it in the family than to sell. Luckily everyone swings big on the campaign trail and gets more moderate when they get in, you can’t fix everything or what will you campaign on next time.
I have a feeling Trust's will be the "go-to" for many if not most, and the various providers for such are possibly sitting with marketing at this moment about to pump the marketing of such.
"I doubt the political will exists to get rid of it"
I don't know. last time Ds owned the world was 2009, however, the make-up of Congress has changed a lot since then. If Congress is D run, odds are new taxes are more likely than not.
Way too many things to fix, like climate change, bad schools, social injustice and inequities - And we've done so great on these up to now. These all need funding, plus they've discovered how easy it is top spend $1T at one shot now, so there's that.
I suggest doing some google searching or simply read this article (https://thediwire.com/biden-pr...) detailing the end of 1031 is not theory, nor talking point, heresy or conspiracy, it is a key component of the incoming administrations tax plan "The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce", that has a $775 BILLION cost to it, making it necessary to create funding for, such as raising capital gains and eliminating capital gains tax measures such as 1031.
I suggest also checking who controls which branch of Gov. as of this moment, as it stands as D across the board for incoming administration, making for a clear path for 2yrs to pass whatever D may desire, such as the new administrations tax plan.
In summary, it's all but certainty it's happening.
Ok, so let's make a friendly wager $100. @Dave Foster can hold the money in escrow for us.
Once again I'll cite political will. NYC alone lost $1.2 BILLION in tax revenue from decreased sales activity in 2020 due to the pandemic. I don't see Congressmen & Women signing up to further hurt their tax bases from real estate transactions.
Scott I so very much want to agree with you, but for your narrative to be true it requires a construct that politicians are 1: intelligent and knowledgeable of actions & effect on the market, and 2: always act for what's in the general publics best interest.
I know this is true on paper, theory and every slogan I have ever heard in every election..... Unfortunately, it has all but never been my experience. My argument too politicians NOT doing what makes sense and NOT doing what is in best interest would be HISTORY, be it 10 years ago, 1yr ago, last month, last week, yesterday or even just 10 minutes ago, lol.
Just for arguments sake, it's the very nature of our system that breeds incomitance. Think about it; we hold a popularity and slogan contest every few years to select who we most "like" to hold the power of dictating and running these major functions. If building a home, would you make your selection via who gave the best speech? Would you choose your Dentist via who is the most "diverse"? Maybe your car mechanic because a tv ad said the other mechanic sleeps around? Yet, we choose our Politicians on merits that have literally nothing to do with the job, we put "community organizers" in charge of who get's nuked, when and for what????? Like, seriously, if that alone dosn't highlight the stupidity in it all I don't know what does. The notion that someone was good at running a campaign, shaking hands and trashing there competitor does NOT have any bearing that they have a clue how economics works and what is or isn't "good" policy to enact.
And yes, I get the argument, they hire the actually informed pro's to tell them what to do. But they still make the decision, my mechanic can tell me all day what's wrong with the cpl idller modulation thing-a-ma-bobby but I have no clue what the hell that even means, more or less am in a position to know if hes correct or full of BS.
I gotta be honest, if I had to choose on betting a politician is going to do great intelligent policy work as it relates to economics and tax policy -OR- a squirrel can be trained to sing the star spangled banner while jumping through hoops of fire..... my money is on the squirrel.
"your narrative to be true it requires a construct that politicians are 1: intelligent and knowledgeable of actions & effect on the market, and 2: always act for what's in the general publics best interest. "
It requires them not being able to fund projects in their states and listening to their biggest donors, and constituents, which a lot of times are RE players.
If you're so sure of your position. My offered wager stands, and it doesn't involve squirrels.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
7. I'll be dancing the 4-9 shift left stage.
Hopefully you pumped all your 1031 profits into real estate, so you have a passive income stream if this 1031 gig doesn't pan out long term;)
"your narrative to be true it requires a construct that politicians are 1: intelligent and knowledgeable of actions & effect on the market, and 2: always act for what's in the general publics best interest. "
It requires them not being able to fund projects in their states and listening to their biggest donors, and constituents, which a lot of times are RE players.
If you're so sure of your position. My offered wager stands, and it doesn't involve squirrels.
If accepted your wager it would be a conflict of interest, I don't want to be right, I hope and pray I am wrong!
I would love nothing better than government to actually work for the people, do smart things, not destroy economies (as I sit here in MN, land of the lockdown and winter outdoor dining....). I am a damn good investor, I DONT loose capital, ever, accepting that bet feels like jinx'ing the ideal outcome of being wrong. Hey, give a politician enough chances they'll eventually do something right, maybe, hopefully.
The government and particularly this new administration needs to keep those coffers filled for all those programs coming down the pike ! They have record spending initiatives on the books they plan to push forward . they will find ways to get it if they could , they will surely take away the 1031 program and to think otherwise is naive . It’s a promise they plan to keep .Sorry but There’s a good reason they are called tax and spend liberals . You are going to have to come up with new strategies is all there is to it . I have been using trusts and definitely plan to continue that in my business for taking title in the future . You are a fool to think these guys are going to pass up billions in lost revenue if they can get their hands on , that’s not political it’s just a matter of reality today .
1- it won't have much affect on myself per-say as I have long prepared for asset transfer strategies that will work well for this too, unintentionally.
2- I am getting back with my CPA, attorney's and trust "pro's" to make sure I am most up to date on everything, and then putting pen-2-paper to help my clients with strategies found that help to mitigate the effects. When I hear "you CANT" my brain translates that to "find out HOW you can via other means", so that's my approach, find out how via other means.
@James Hamling, Well, I've got a vested interest because if it happens I'm unemployed and looking at other lines of work (How does "Stormy" sound for a stage name?_. And I too must confess a moment of "sky is falling" emotion. But, after realizing that it only takes one democratic senator who owns investment property and uses the 1031 exchange to shift the majority back I found my zen place again!
And after 20+ years in this business both as a user and intermediary I can tell you that every president (red and blue) during my time has publicly floated the idea of repealing 1031. Know who the only president is who actually monkeyed with it - The outgoing one!!!
So there's a lot of runway between here and there. But here are some pretty sure consequences.
1. People will hold all properties longer so inventory will be further decreased.
2. There will be less incentive to value add as cash flow will be emphasized. Sadly this means the probable increase of ill kept for rental properties where the minimum is done to keep rent checks coming in.
3. Low performers will sit in your portfolio and drag it down because of the tax consequences of a sale.
4. Buyers will have less net cash to purchase new property so sales volume will drop. this will offset lower inventory and result in a net retreat of prices to incentivize velocity. But Long term plays like NNN commercial will be highly sought after. Again, the 1% will benefit.
5. what worries me more is the elimination of the step up in basis. Because that will encourage multigenerational ownership through entity structure rather than a passing of the torch and new investment activity by the next gen. Family farms will have to be sold to pay the taxes to the estate.
6. The lawyered up folks will figure a way around it. The regular folks will pay for the deficit.
7. I'll be dancing the 4-9 shift left stage.
Dave, you're top notch. If you do end up unemployed I'll be happy to have you back on and drive traffic to whatever you're doing at that point (outside of the 4-9 gig...).
The step up basis seems to be the thing the 1031 guys are worried about, on the whole. I would tend to agree with them. That goes most closely to the real boogeyman (as seen by a certain type) - generational wealth. With the 1031 the tax man eventually gets his pound of flesh. Step up basis takes that away.
Isn’t Biden gonna funnel the money into expanding section 8 for all who qualify?
Those who qualify (like 20% of renters) or those who desire (like 98% of renters)?
I believe his proposal was to expand the program so that there is enough funding to cover all who qualify. Qualifications depend on income compared to the AMI of that area. From what I understand there is currently only enough money in the program to cover a small percentage of those who qualify, with extremely long waiting lists.
