How will the death of the 1031 impact you???????

[James Hamling]

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. 

Interesting times indeed.......

[Dave Foster]

@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.