Capping 1031 exchanges would cripple Wisconsin’s commercial real estate economy and farmers – The Daily Reporter – WI Construction News & Bids
An essential tool in rebuilding our American economy is seriously at risk under the US $ 1.8 trillion family plan under consideration in Washington – and the damage will be felt in every state, city, and town that are still affected by the ravages of COVID-19.
For the past 100 years, peer-to-peer exchanges that allow investors to defer taxes on property sales when the proceeds are reinvested in new property have been a cornerstone of the U.S. commercial property market, bringing economic benefits at all levels to the amount by far exceeding deferred taxes. The $ 1.8 trillion plan unveiled last month by President Joe Biden is to cap the amount of profits that can be deferred to $ 500,000.
This ceiling is a recipe for economic stagnation, not recovery.
Every community in the nation, including this one in Wisconsin, has seen countless malls, malls, and restaurants close due to the pandemic. The fallout continues in hotels and office buildings. Virtual meetings will permanently replace significant business travel and many people will work exclusively from home. In order for the economy to regain its strength, considerable reinvestments are required to convert these properties and develop new commercial areas.
The Federation of Accommodators, the national organization of 1,031 listed companies, analyzed and aggregated data from 8 companies in Wisconsin. This is only part of the market. There are many more companies that facilitate the exchange. The data covered the years 2015 to 2019. They found that 3,225 properties were involved in the exchange with these companies during that period. They were worth a total of $ 4 billion. These transactions also generated $ 12 million in state and county transfer taxes and enrollment fees in Wisconsin. It is estimated that 15 to 20% of all trade transactions involve a 1031 exchange. In agriculture it is more like 30%. It provides basic liquidity for real estate. It is clear that Section 1031 is important to the Wisconsin real estate industry and generates significant tax revenue for state and local governments.
Section 1031 brings important capital to revitalize communities in Milwaukee and the surrounding suburbs. It was used to provide affordable multi-family housing in working-class communities and to move a neighborhood grocery store into a “food wasteland”. In the suburbs, section 1031 was recently used to revitalize a strip mall that was 70% vacant after losing its anchor business.
Proponents of the cap may argue that the provision is a “loophole” to avoid paying taxes on profits. In reality, a 1031 exchange is a deferral, not a tax abolition, and according to a study by Professors David Ling of the University of Florida and Milena Petrova of Syracuse University, 80% of taxpayers only swap 1031 and then the property in a taxable sale sell.
Taxes are paid over a period of 15 years. A restrictive cap – whether $ 500,000 or some other amount – on commercial real estate reinvestment and real estate redevelopment at this critical juncture in our country’s economy would spin an already ailing commercial real estate market. In addition, a recently updated macroeconomic study initiated by Ernst & Young in 2017 concluded that reducing or removing section 1031 would shrink GDP.
It also examined the potential benefits of using 1031 exchanges in 2021 and concluded that transactions from Section 1031 exchanges secure 568,000 jobs (260,000 in companies using 1031 and another 308,000 from suppliers to those companies) and 27 , Generate 5 billion US dollars in labor income, which in turn will generate an added value of 55 billion US dollars to GDP. In addition, $ 5 billion in federal taxes will be deducted from the jobs and $ 6 billion annually in additional federal income taxes due to lost depreciation (reduced deductions) on the replacement property and $ 2.8 billion in state and local taxes generated.
The $ 5 billion jobs generated in a year alone far exceed the estimate in the Biden 2021 budget, which says that an upper limit of $ 1031 to $ 500,000 will average $ 1.95 billion. Dollars a year is increased over 10 years. Why would anyone change section 1031? According to the study by Ernst & Young, it does not make any money.
Similar exchanges play a vital role in many facets of the country’s economy, including:
- Promotion of the renovation of ailing commercial real estate;
- Financing the construction or renovation of apartment buildings and affordable housing;
- Enable companies to move to larger facilities while keeping their capital in the company;
- allow the middle class to build a real estate portfolio that will one day finance retirement;
- Farmers, ranchers and forest owners are heavily dependent on exchanges of a similar nature;
- a similar exchange promotes land and environmental protection.
The revitalization of our economy has to come from many sources. It is clear that additional federal infrastructure and financial aid programs are needed. But the private sector also still has a major role to play in the recovery. An essential part of the infrastructure – the buildings that make up our housing stock, offices, shops, warehouses, and many other types of real estate – is missing. These structures require just as much ongoing capital commitment as roads, bridges and other parts of the infrastructure. The best way to encourage improvements and strengthen this inventory of infrastructure is to leave section 1031 unchanged to encourage investment, and most importantly, reinvestment in the real estate industry.