Several weeks back, we wrote about the potential for Joe Biden, should he be elected President, to eliminate 1031 exchanges as one approach to fund his childcare and eldercare programs, a cornerstone of his $775 billion, “21st Century Caregiving and Education Workforce Plan.”
In our article we provided our thoughts on the potential impact to investment property owners and the commercial real estate industry at large, should Biden win and target exchanges. We reminded readers that 1031 exchanges have been around for nearly 100 years and have proven to be resilient to proposed changes by both political parties over the last several election cycles.
This time, the stakes could not be higher and opposing views could not be more polarized. It is critical to bring this to the attention of our clients and industry partners once again, and to add additional perspective.
We Have Been Here Before
As mentioned, 1031 exchanges have weathered attacks before, and studies have been conducted to help uncover the real economic impacts of eliminating exchanges. In fact, E&Y completed a study in 2015 around the last time legislators were considering such changes, and the findings were sobering for those who might have expected a governmental tax windfall. The study estimated:
- GDP to fall by $8.1 billion each year (0.04% decline in 2013 dollars) in the long run
- Investment to fall by $7.0 billion (0.18% decline in 2013 dollars) in the long run
- Labor income to fall by $1.4 billion (0.11% decline in 2013 dollars) in the long run
Keep in mind, this was a 2015 study. In addition, the projected benefit (or cost) to the economy looked like this:
- Estimated tax revenue to Treasury over 10 years (repeal score for years 2014-2023 by Joint Committee on Taxation) $40.9 billion
- Estimated reduction of overall U.S. GDP over 10 years (EY Study) $61 – $131 billion
Voices Rise Up
For years, Fortitude Investment Group has been committed to working closely with and helping clients successfully complete their real estate transactions. Of equal importance, we have been a firm that has supported industry advocates like the Federation of Exchange Accommodators (FEA), helping communicate and reaffirm the economic importance of 1031 exchanges to the health of the overall US economy. As former FEA President Scott Saunders has highlighted:
“There are many reasons why 1031 exchanges have been a vital part of the tax code for 99 years. Section 1031 helps increase transactional activity and ultimately 1031 exchanges create thousands and thousands of jobs nationwide.
The pandemic is having a big impact on real estate and 1031 exchanges will be a key tool to help repurpose and reimagine commercial real estate and will help business owners and investors – both small and large – redeploy capital into better performing properties.“
– Scott R. Saunders, Sr. Vice President Asset Preservation Inc., and Former FEA President
As the election edges closer, other well-respected industry veterans like our colleague, Francis Greenburger, have been increasingly vocal in bringing an informed and balanced perspective to the table:
“1031 exchanges are “critical to the economic function of the real estate markets” and “efforts to cut them come from a lack of understanding about their economic benefits.”
“Somebody who’s talking about eliminating these doesn’t fully comprehend why this is a good thing. They’re just looking at it superficially.”
– Francis Greenbuger, head of Time Equities & EY’s 2020 Entrepreneur of the Year for New York
Devil is in the Details
Try this. Conduct your most robust online search and download Joe Biden’s proposed tax plan. Then let us know when you have it. Hmm. Could not find it? You are not alone. While Google serves up 101,000,000 search results for “Biden Tax Plan,” it is actually quite difficult to locate. According to KPMG comments in its August 2020 report “Biden’s Tax Proposals:"
“How detailed are Biden’s tax proposals? Not very, which is not surprising for presidential campaign proposals. For the most part, Biden’s tax proposals are short and very high level. There is also no detailed separate technical explanation of the proposals.”
“In addition, some of the descriptions of the proposals could lend themselves to multiple interpretations from a technical tax perspective. For example, while the Biden campaign has indicated support for limiting the ability of some investors to use real estate losses, it has not spelled out whether this might be accomplished through changes to passive activity loss rules, depreciation rules, passthrough loss limitation rules, or otherwise.”
Is the 1031 exchange specifically mentioned in Biden’s proposed plan? If so, it is not easily found, and therein is either cause for comfort . . . or concern. We believe there is great cause for concern.
A Call to Action
Fortitude Investment Group continues to advocate for the 1031 exchange on behalf of our clients, partners, and the real estate investment industry. We encourage you to reach out to your legislators to share your views on this most important issue!
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