Browse Tag: inland

Inland’s Dan Goodwin: 1031 Exchanges Are No Loophole


[Reprinted today is an editorial by Inland Group CEO Dan Goodwin (pictured above) focused on tax reform. Namely, that efforts to clean up the federal tax code of unwanted loopholes should leave in place like-kind exchanges as provided under IRS Section 1031 – a favorite topic of our industry as it provides a significant tax shelter (deferment) for the continued investment in commercial real estate. To the surprise of nobody, Dan’s very much in favor of 1031, but his arguments take one tack I hadn’t seen used much before — that 1031 exchange sales do generate local transfer taxes. -WG]

Why Pro-Growth Tax Reform Must Preserve Like-Kind Exchanges

Daniel L. Goodwin
CEO, Inland Group

With our economic recovery finally accelerating, pro-growth tax reform offers the potential to further prime the U.S. job creation machine. But not all reform proposals effectively safeguard key incentives that fuel domestic investment, new hiring and the enrichment of individual communities. One of the most notable provisions at risk—like-kind exchanges—empowers both businesses and individual property owners to roll over their capital into new investments that spur economic activity across the country.

In advance of debates over which provisions are unwarranted tax loopholes and which are economic growth engines, elected officials on both sides of the aisle should reacquaint themselves with Section 1031’s purpose. Like many of my peers in the investment and real estate industries, I was quite concerned when Sen. Johnny Isakson (R-Ga.) recently noted that most lawmakers do not fully comprehend the potential economic impact of limiting like-kind exchanges.

Put simply, a like-kind exchange enables a business or investor to defer—not dodge—the capital gains tax on a non-personal asset sale, provided that the capital is reinvested in a comparable asset within a prescribed time period. This practice of rolling over and reinvesting proceeds is actually a core catalyst of domestic real estate activity and helps fuel our entire economy.

When conceptualizing the value of like-kind exchanges, think about how the IRS’s home sale exemption permits homeowners to defer capital gains taxes generated by selling their house. This homeowner tax provision encourages individuals and growing families to apply the proceeds from their home sale to the purchase of a new house. The home sale tax deferral spurs real estate transactions, which like 1031 commercial property exchanges, generate local transfer taxes and provides employment for the following small businesses: appraisers, accountants, contractors, mortgage bankers, real estate brokers as well as both law firms and title companies (just to name a few).

If a home seller had to write a check to pay state and federal capital gain taxes at the time of a sale instead of deferring the taxes, owners may choose not to sell, which would be devastating to the housing market with a consequential loss of employment opportunities for many small businesses.

Similarly, if commercial property owners were forced to pay capital gain taxes at the time of sale, a number of people would not sell, resulting in a loss of local transfer taxes and the loss of income for small businesses. Make no mistake about it; most tax free exchanges occur because commercial property owners want to move up to a larger property and reinvest their capital just like homeowners, not because they need to sell. People who elect tax free exchanges are voluntary sellers who, in many cases, will not sell if the 1031 program is eliminated.

In attempting to advance reform that will simplify our federal code and help reduce the deficit, it is understandable that leaders in Washington want to evaluate all existing tax policies. However, Congress must remain deliberate and measured throughout this process to ensure we do not eliminate economic catalysts within our existing code.

Like-kind exchanges contribute to the growth of our economy by stimulating transactional activity and promoting investments across the country.  A United States manufacturer, for example, cannot obtain a 1031 deferral benefit by moving a plant overseas; it must reinvest domestically, promoting local business growth. This reinvestment also provides revenue for local governments in the form of transfer taxes, increased property taxes, new construction and improvements to existing structures—all of which build communities, job growth, and quality of life.

To illustrate what a negative chain reaction could look like; consider what happens if a capital gains tax deters a small business from selling its long-held manufacturing building in favor of a modern structure. The business does not stimulate the local economy through the use of other small businesses; it does not contribute new local fees and transfer taxes; and it is prohibited from taking necessary steps to grow its own enterprise. Similarly, a farm family that wants to expand to a larger farm to provide work for the farmer’s children often needs to defer the capital gains tax to make the transaction economically viable.  Without the 1031 program it is doubtful that many farmers could afford to upsize; with the resulting loss to the economy of many benefits such as the purchase of larger farm equipment, as well as, all the other real estate related expenses mentioned above. If countless property owners across the country are facing a similar disincentive to sell, the health of our economy could be affected.

Remember that under Section 1031 capital gains taxes are deferred—not eliminated.  The Federal Government ultimately receives all of its taxes, while stimulating local economies and growing small businesses.  Additionally, following a tax free exchange, real estate depreciation which generates tax deductions is limited; thereby actually generating more net federal tax revenue.

To be clear, I agree that our federal tax code is in need of an overhaul. The new Congress has a tremendous opportunity to modernize and streamline an outdated system, but it should not come at the expense of eliminating tax provisions that fuel significant growth.

As new legislation is drafted, lawmakers should draw on information shared by the Real Estate RoundtableNAREIT, the Federation of Exchange  Accommodators and National Association of Realtors to better understand how like-kind exchanges increase the size and number of real estate transactions, which stimulate the economy.

Individuals, trade organizations, small businesses, and research studies confirm the obvious benefits of keeping Section 1031 as a pro-growth and pro-taxpayer economic catalyst.

Goodwin is chairman and CEO of The Inland Real Estate Group of Companies, Inc., one of the nation’s largest commercial real estate and finance groups.

Developer’s Long Shopping List In Chicago Supermarket Shakeup

A Safeway before opening time. (This is NOT a ...

In the wake of grocery giant Safeway’s recent exit from the Chicago area market, Oakbrook, IL-based Inland Real Estate Group of Companies has gone to the market to pick up a few things.

Weighing The Anchor

When Safeway’s Chicago chain Dominick’s announced its closure and pullout in October, the history of the Chicago supermarket took a notable turn as 66 Dominick’s stores were to shut down at once, creating a metro-wide absorption problem in the anchor store space not seen before.  Two million square feet of mostly leased space (Safeway owns only about 15 buildings), based on an average store size of 62,000 sq. ft. landed on the market with a deafening bang, leaving landlords anchorless, pondering cutting rents or rethinking grocery’s traditional anchor role.

Even though California-based Safeway remains solvent, meaning rent payments on empty store leases won’t be interrupted, the shopping centers stuck with vacant grocery stores face more than just a financial problem.  Traffic loss looms large over rent negotiations and the symbolism of such conspicuous closures means economic health of entire neighborhoods might be at stake.

Mariano’s Steps Up (For A Few Locations)

Led by former Dominick’s CEO Bob Mariano, the namesake grocer chain stepped into the breach, announcing plans to buy 11 of the 66 stores in locations it prized.   In a $36 million cash deal with Safeway, Mariano’s will undertake conversion of 11 stores, the majority located in suburbs.

That isn’t likely to be the last expansion of the Mariano’s brand into Chicago, for two reasons.  As Bob Mariano told investors, the city and suburbs can support 50 stores.  The second reason is the developer interests in the wake of Safeway’s exit.

Inland On Both Sides

Inland’s been on a buying tear to get behind the Chicago expansion of Mariano’s, a subsidiary of Milwaukee-based Roundy’s, Inc., racking up nearly $90 million in recent acquisitions. Since 2011, Inland, a broker/developer/landlord/REIT owner, has booked acquisitions and undertaken a joint venture to develop a Mariano’s-anchored shopping center with an option to buy.

Yet that activity is also defensive from Inland’s point of view, because as reported by Chicago Real Estate Daily, the firm owns seven properties leased to the shuttered Dominick’s as well as three shopping centers anchored by the chain.

Does Mariano’s have the punch to restore to landlords and communities what the Safeway/Dominick’s pullout takes away?Maybe. As Micah Maidenburg reports in CRE Daily:

Safeway’s impending exit has likely unsettled some real estate investors who have long viewed grocery chains as stable investments. Yet Mariano’s is seemingly gaining acceptance among investors. Parent company Roundy’s had net sales of $3.89 billion in 2012, even if it had a net loss of $69.2 million. The Mariano’s unit, which leases all of its stores, has 13 locations in the Chicago area, with plans for five more in 2014.

“As the local footprint here for Mariano’s continues to grow and there’s more historical reference to their unit-level performance being sustained, you’ll continue to see investor demand grow,” said Brandon Duff, regional director in the Chicago office of real estate brokerage Stan Johnson Co. who has handled Mariano’s transactions […]


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