Browse Tag: 1031 exchanges

Legislative Update With Erin Stackley At NAR Expo 2014

Photo of NAR's Erin Stackley

The Friday morning buzz at NAR Expo 2014 on the commercial track included a legislative update from Erin Stackley, the Commercial Legislative Policy Representative from NAR’s Governmental Affairs.

NAR is always busy on Capitol Hill, and Erin let the commercial-track audience know what’s on the docket:

  • Tax Reform Proposals: “Tax reform is not going to happen in the 113th Congress,” she said.  “But [our] reform proposals, one in the Senate, one in the House, could easily be picked up […] in the 114th Congress”.  She went on to mention the 179D Energy Efficiency Commercial Building Deduction, an existing deduction where she expects passage of an extension during this Congress.   According to the IRS, the 179D deduction allows deductions of up to $1.80 per square foot for owners or lessees of commercial buildings to which property has been installed as part of internal lighting systems, heating, cooling, ventilation or hot water systems.
  • 1031 Like-Kind Exchange:  As this tax shelter approaches its 100th anniversary on the books, efforts of Congress to raise revenue by removing the tax protection are opposed by NAR every step of the way.  “We’re working on getting together surveys and studies, more data and anecdotes on 1031 that we can bring to Congressional offices and say ‘this happened, this created this many jobs'”
  • Legalization Of Marijuana: Given that federal law still opposes the use or possession of marijuana, the break in continuity between federal and state, state and state, state and county and county and county has created an enormous risk area for property managers and owners.  Stackley said “23 states and the District of Columbia have passed various ordinances and laws that are decriminalizing marijuana, wether ofr medicinal use, or small amounts of recreational use. If [a property manager] has a non-smoking policy, does that cover marijuana use?  […] What sort of liability are you opening yourself up to?”  She then made reference to a white paper on the topic, a work of her colleague Megan Booth and IREM.  You can find a copy of the IREM white paper “Marijuana Legalization Laws” after the jump.

To get a full recording of Erin’s Legislative Update, pick up a recording at Playback NAR of the session she appeared at, “Protect Yourselves from Mold, Bed Bug and Code Compliance Issues: Property Management Forum”

Politician Cites 1031 Exchanges As…Divine Financial Advisory?

US Capitol Building

Ah, the political season.  The time when persons with sometimes monumentally odd ideas about cause and effect stand on a stump and broadcast these ideas loudly and clearly.

Well, loudly, anyway.

Meet Ben Carson.  A retired surgeon from Detroit, Carson’s political star is rising thanks to a strong showing in a recent straw poll. Riding the wave of recent notoriety brought him to a radio appearance, where an interviewer asked, in the context of Carson’s self-declared religious faith, if he had ever been “angry with God”.

Incredibly, his answer somehow included one of the real estate industry’s most venerable tax deferments and a favorite topic here at The Source: the IRS 1031 exchange.

The only other question I was given time to pose came […] when I asked Carson, who self-identifies as deeply religious, if he’s ever doubted or been angry with God.

Yes, indeed, he indicated, recounting an incident in which the Lord apparently subjected him to Job-like tortures over a problem involving residential real estate. After buying a new house, he just couldn’t unload the old one. “My house was on the market for five years. And I said, ‘I pay my tithes. I am faithful. I try to help people. So why is this happening to me?’ ” Carson told me.

“And [then] I found out about the ‘1031 Exchange’ [named for a tax code provision] where if you sell a piece of property and you make a very, very large profit on it, you don’t have to pay huge taxes on it if you can roll it over into another property of higher value.”

Carson’s story went on in this disjointed fashion, and didn’t seem particularly illuminating, except to suggest that it definitely wasn’t an ordinary crisis of faith and the Almighty must be a savvy adviser on the Internal Revenue Code.

So Where Did 1031 Exchanges Come From?

While it’s far from clear if Carson believes 1031 exchanges to be the work of a higher power than Congress, his answer provides food for thought. Given that I’ve written about 1031 so many times, I thought I might contribute some clarity on the point.

1031 exchanges first appeared as part of the Revenue Act of 1921, passed as a package of federal tax reductions by a Republican-majority Congress on November 23 of that year. Lauded by Treasury Secretary Andrew Mellon, the Act repealed a tax on wartime excess profits, reduced the top marginal rate on individuals from 73 to 58 percent and instituted a new and more easily avoided corporate tax.

Specifically for Dr. Carson’s benefit: everything Congress votes on is in the public record.  And a quick look at that 1921 Senate vote (found here) lists many luminaries, including  future President William McKinley (voted aye), Wisconsin firebrand Bob LaFollette (nay), and Delaware’s quasi-aristocratic Thomas du Pont (no vote).

The almighty, however, is not listed in the roll call.

(Photo credit: ttarasiuk)

How To Get 1031 Exchange Data From The IRS

Seal of the United States Internal Revenue Ser...

An earlier post here at The Source about 1031 exchanges of property under IRS “like kind” exchange rules drew a bunch of comments and interest in the data. Readers wanted to know: does the IRS perform or compile 1031 studies? Do they publish regional studies of these exchanges under IRC 1031?

So I opened up a channel to the IRS’s Statistics Of Income Division (SOI) and asked these questions back in December. I then received and shared a whole ton of national data on 1031 exchanges from 1995 to 2010.  While the volumes of 1031 exchange deals and splits were nice to see, the IRS did not provide regional breakouts.

I received some additional comments on that post last week, asking if Uncle Sam had a) updated the data to reflect 2011 or later or b) put together regional reports.

Since it worked so well last time, I headed right back to the SOI Division and asked for any updates.  And once again, a friendly specialist responded with lightning speed:

Thank you for contacting the Statistics of Income (SOI) Division regarding the availability of 2011 and 2012 Like-Kind Property Exchange data.

The most recent Tax Year 2010 Form 8824 – Like-Kind Property Exchanges data – are available on the Tax Stats section of the IRS web page at http://www.irs.gov/uac/SOI-Tax-Stats-Business-Tax-Statistics. We do not have a release date for the 2011 data, but it will be available on this web site when it is released.

We do not compile a geographic history of such exchanges for any period and future data will not have geographical breakouts, only national totals.

So there you have it: no publication date is set for 2011 data, but if last year is any indication, I’m expecting it by December.  And it turns out that Uncle will not be indulging us with regional breakout reports.

That said, the above IRS web page is a treasure trove of national data on business taxes.  What economic or market indicators exist in the links?  That’s up to you to find out.

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NAR Conference & Expo: Inland’s Patricia DelRosso Talks 1031 Exchanges

Tax

Tax-deferred exchanges of commercial property can postpone and even eliminate federal taxes due on the sale of properties that qualify for tax-deferred status.  Since 1921, the IRS Section 1031 exchange rules have been in place with the intent and effect of generating capital for investment.  Tax deferment on an exchange of property in “like kind” as 1031 stipulates is effectively an interest-free loan from the federal government in the amount of the taxes that would have been due on a simple sale.

As great as that sounds, navigating the obstacle course in qualifying is a challenge for most, meaning it’s a full-time job for some. Patricia Del Rosso of Inland Private Capital has built a major practice in 1031 transactions, and came to talk about 1031 to clients trying to get their tax-deferred exchange strategies in a row.

Rise In The Investment Market Means Rise In 1031 Demand

“1031 transaction volume has increased over the last 18 months – between 50% and 100% nationwide” said Del Rosso. “The capital markets were in paralysis — potential buyers had to means to buy, which hit commercial very very hard.”. But the new commercial market had more stringent financing requirements.  “Requirements for lower loan-to-value ratios and more restrictive clauses and covenants” means that 1031s loom large as an more attractive source of capital to get a deal done.  “We see more potential exchangers coming off the sidelines and getting the prices they want.  It’s uneven – [some markets] are still very bad and will take more time, but elsehwere, you see multiple offers and some move to a new transaction form: setting up auction bid processes.”

Paid-Up Baby Boomers Looking To Sell

DelRosso described a key 1031 demographic: baby boomers, whose interest in tangible assets means they have often invested in and worked/managed commercial property, and are now looking to retire.  “[They] want to parlay their sweat equity and capital appreciation into something with more predictable income. There’s a huge population for this, growing all the time. They consider 1031 because they have held the property for so long. the rents they have received have gone to pay the mortgage… over 10-20 years, they may not have any debt. If they do, it’s probably quite small. typically they have not raised the rent according to market conditions. you often find they have very low returns and they dont even realize it.  – some as low as .5 to 2%.”

The Tax Situation

While you may not have access to a seller’s form 1040, you’d be surprised what sellers divulge when talking to a professional.  DelRosso explained “They have taken deductions that have brought them into a negative position in terms of the money they’ve invested in the property.  They forget they don’t have a zero tax basis, they have a negative tax basis. So they don’t realize when they sell, they have to come back to at least a zero tax basis on the property. They’re surprised they owe taxes on the property at sale time.”

The 1031 benefit is the natural fit for that situation – but of course an exchange needs to take place, so property to exhange needs to be identified and strict timeframes for the exchange under 1031 must be met.  Del Rosso’s strategies and tactics here  are many, including a Deleware Statutory Trust, a business trust called into exchanges partially for the purpose of facilitating a 1031 exchange.

You can get a full audio recording of Patricia Del Rosso’s presentation to REALTORS Conference & Expo 2012 “Increasing Your Market Share Via 1031 Exchanges” at PlaybackNAR.