Do they deserve the tax break? – Orange County Register

One of the benefits of our profession is that we gain insight into future legislation at the state and federal level that may affect our livelihoods.

You see, the commercial real estate lobby is quite influential. Remember, the huge push that happened last year in California to defeat Proposition 15 which would have changed the way property taxes are calculated for commercial properties.

Right now, Congress is talking about eliminating tax-deferred trades that are accomplished through Section 1031 of the Internal Revenue Code. The clawback for the massive infrastructure plan has to come from somewhere, and wealthy commercial property owners are a likely target.

In short, tax-deferred swaps allow holders of commercial real estate titles to defer capital gains tax when selling an income-producing property. Certain criteria and deadlines must be respected. Otherwise, if a sale occurs, approximately 50% of the capital gain is consumed by federal and state tax collectors. Therefore, the motivation to sell would be suppressed except in extreme cases.

A webinar hosted by David E. Franasiak, attorney at Williams and Jensen, PLLC and Julie Baird, president of First American Exchange Co., discussed the Biden administration’s US family plan and the end of a special tax break on real estate, “which real estate investors defer taxation when they trade in property – for gains in excess of $ 500,000.”

With a limit of $ 1 million for couples filing jointly, Section 1031 would effectively be removed, and if the proposal becomes law, it could go into effect for deals concluded after December 2021.

I’d like to look at exchanges from a different perspective: are they really important to those who don’t own commercial property? As I am admittedly biased, I will simply offer three thoughts for consideration.

Commercial real estate transactions employ a significant number of people. My premise? Eliminating transactions attracted by tax deferral would also crater all the jobs associated with those transactions.

I once calculated that 32 different people were involved in a purchase. Specifically, escrow agents, title agents, environmental surveyors, roofing inspectors, general contractors, general sub-contractors – air conditioning, electricians, plumbers, flooring. Not to mention professionals such as CPAs, lawyers and wealth advisers. Buckle up a few brokers and the set is complete. Dollars earned by those involved are pumped back into the economy, and groceries are purchased, rent is paid, and college funds are established. And state and federal income taxes are paid out of their income.

Small business owners who reside in commercial real estate through ownership use the tax-deferred exchange mechanism to expand their business. Keep in mind that business owners use IRS Section 1031 to purchase larger facilities and grow their business. Operational growth means equipment is purchased, workers are hired, and taxable income is created.

Eliminating the tax-deferred exchange rate mechanism would generate $ 19.5 billion over 10 years on a $ 2.4 trillion stimulus package. Unfortunately, the increment is so small that it looks like a rounding error. Too often we lose sight of the unintended consequences of the actions we take.

For example, when access to home loans was expanded two decades ago, the subprime collapse resulted. Certainly there was more to this story. But you get the idea.

Allen C. Buchanan is a Principal at Lee & Associates Commercial Real Estate Services at Orange. He can be reached at [email protected] or 714.564.7104. His website is allencbuchanan.blogspot.com.

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