WASHINGTON, DC–Congress and the Trump Administration will soon be turning their attention to comprehensive tax reform — an ambitious project that promises to overhaul and simplify both corporate and personal taxes, reduce the corporate tax and close certain tax breaks, such as the 1031 like kind exchange.
While the CRE community would be delighted to see a simplified tax code with lower rates, the elimination of the 1031 would be a harsh blow. Even worse, there has been talk of Congress and the Trump Administration pushing forward a narrower bill that is essentially just a tax cut — and paid for by eliminating some of these breaks such as the 1031. However it is just talk, nothing has been formally proposed as of yet.
After speaking with a few CRE specialists that have ties to Capitol Hill, GlobeSt.com has put together a FAQ on the situation as it stands right now.
Will there be a narrower bill introduced that would target 1031s?
Anything is possible but what is more likely to happen is that comprehensive tax reform will morph or transform into more of a tax cut. So instead of a grand, comprehensive tax measure such as the 1986 tax reform we will see something more akin to the Bush tax cut of 2001.
Why?
For starters, there is a lot of opposition to the blueprint put forward by the House of Representatives, which calls for a border tax and other concepts that are untested and risky. So it is a combination of that opposition plus fear of the untested ideas.
Some in Congress are calling for a twenty-year payback provision instead of a ten-year one. How does that come into play?
That is related to the fact that this tax measures is passing via reconciliation, which requires laws to be deficit neutral at the end of ten years. Since this is just a Congressional rule it is easy enough to change and people are coming to the realization that if tax reform doesn't pay for itself in ten years, why not make it twenty?
Would that save the 1031?
It is hard to say one way or another. Doing away with the 1031 is definitely among the possibilities to help raise money or otherwise partially pay for the tax cut. And it's not certain Congress would move to a twenty-year payback period.
Why is the 1031 an attractive target for the tax bill?
Because it would raise a lot of money for the government if they did away with it due to the way bills are scored. In this case, the score-keeping is based on the assumption that if like kind exchanges were eliminated, all of those exchanges would be outright sales instead. That produces a large and very tempting number. That is not a correct assumption at any rate.
How so?
Because like kind exchanges are rarely ever a straight trade; some money is added or subtracted. If the like kind were eliminated some sellers would not put properties on the market at all. As an added note, studies show that when a property is acquired via a trade instead of a sale the new owner puts more money into renovations, which is additional stimulation to the economy.
Okay, there is a lot of uncertainty but something is going to pass eventually, correct?
Not necessarily. At least not in the next two years. Congress is in danger of running out the clock for this legislative session and they are unlikely to push a major bill through like tax reform during an election year. On the other hand, it is an important issue to both Congress and the Trump Administration so every effort will be made to pass something.
WASHINGTON, DC–Congress and the Trump Administration will soon be turning their attention to comprehensive tax reform — an ambitious project that promises to overhaul and simplify both corporate and personal taxes, reduce the corporate tax and close certain tax breaks, such as the 1031 like kind exchange.
While the CRE community would be delighted to see a simplified tax code with lower rates, the elimination of the 1031 would be a harsh blow. Even worse, there has been talk of Congress and the Trump Administration pushing forward a narrower bill that is essentially just a tax cut — and paid for by eliminating some of these breaks such as the 1031. However it is just talk, nothing has been formally proposed as of yet.
After speaking with a few CRE specialists that have ties to Capitol Hill, GlobeSt.com has put together a FAQ on the situation as it stands right now.
Will there be a narrower bill introduced that would target 1031s?
Anything is possible but what is more likely to happen is that comprehensive tax reform will morph or transform into more of a tax cut. So instead of a grand, comprehensive tax measure such as the 1986 tax reform we will see something more akin to the Bush tax cut of 2001.
Why?
For starters, there is a lot of opposition to the blueprint put forward by the House of Representatives, which calls for a border tax and other concepts that are untested and risky. So it is a combination of that opposition plus fear of the untested ideas.
Some in Congress are calling for a twenty-year payback provision instead of a ten-year one. How does that come into play?
That is related to the fact that this tax measures is passing via reconciliation, which requires laws to be deficit neutral at the end of ten years. Since this is just a Congressional rule it is easy enough to change and people are coming to the realization that if tax reform doesn't pay for itself in ten years, why not make it twenty?
Would that save the 1031?
It is hard to say one way or another. Doing away with the 1031 is definitely among the possibilities to help raise money or otherwise partially pay for the tax cut. And it's not certain Congress would move to a twenty-year payback period.
Why is the 1031 an attractive target for the tax bill?
Because it would raise a lot of money for the government if they did away with it due to the way bills are scored. In this case, the score-keeping is based on the assumption that if like kind exchanges were eliminated, all of those exchanges would be outright sales instead. That produces a large and very tempting number. That is not a correct assumption at any rate.
How so?
Because like kind exchanges are rarely ever a straight trade; some money is added or subtracted. If the like kind were eliminated some sellers would not put properties on the market at all. As an added note, studies show that when a property is acquired via a trade instead of a sale the new owner puts more money into renovations, which is additional stimulation to the economy.
Okay, there is a lot of uncertainty but something is going to pass eventually, correct?
Not necessarily. At least not in the next two years. Congress is in danger of running out the clock for this legislative session and they are unlikely to push a major bill through like tax reform during an election year. On the other hand, it is an important issue to both Congress and the Trump Administration so every effort will be made to pass something.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
