William E. Brown and Daniel Wagner | Sacramento Business Journal |
An essential tool in rebuilding our American economy is at serious risk in the $1.8 trillion American Families Plan being considered in Washington. The plan proposes to cap the amount of gain that can be deferred for tax purposes at $500,000 for Section 1031 like-kind exchanges of real estate. This shortsighted and counterproductive cap is a recipe for economic stagnation, not recovery.
Every community in the nation, from the Bay Area to Sacramento and across California, has witnessed the closing of shopping malls, strip centers, hotels, office buildings and restaurants due to the pandemic. A substantial reinvestment to repurpose these properties and redevelop commercial spaces will be required for the economy to regain its strength.
Section 1031 provides important capital to revitalize communities throughout Northern California and grow our economy. It has been used to provide affordable multifamily housing in working class communities, bring food stores into neighborhood “food deserts” and revitalize strip shopping centers that were 70% vacant. Growing businesses use it to relocate when they’ve outgrown existing space.
The Federation of Accommodators, the national organization of 1031 exchange companies, analyzed data from seven companies in California from 2015 to 2019 and found:
• 72,787 properties involved in exchanges.
• A total value of these exchanges of $160.3 billion.
• $2.74 billion generated in transfer taxes, mortgage taxes and recording fees.
Clearly Section 1031 generates significant tax revenue for both county and city governments in Northern California.
Ernst & Young estimated that the reinvestment through 1031 exchanges for the coming year in 2021 will generate:
• More than 560,000 new jobs.
• More than $27.5 billion in labor income.
• $14 billion in federal, state and local taxes.
• $55 billion to gross domestic product.
Proponents of the cap argue the provision is a “loophole” used to avoid payment of taxes on gains. In reality, 80% of the taxpayers do only one 1031 exchange and then dispose of the property in a taxable sale. A 1031 exchange is a deferral, not a deduction. The capital gains get paid in roughly a 15-year window, in addition to the $14 billion in taxes generated every year by Section 1031, according to Ernst & Young.
Additionally, that $14 billion generated every year far exceeds the estimate in the 2021 Biden budget which says capping 1031 at $500,000 will raise $19.5 billion over 10 years — or an average of $1.95 billion per year. Why would anyone change Section 1031? It doesn’t raise any money.
A cap — whether $500,000 or any other amount — would send an already struggling commercial real estate market into a tailspin. The private sector must play a significant role in the resurgence of our economy, as it always has. The best way to attract the private capital needed to improve and strengthen our communities and our infrastructure is to keep Section 1031 unchanged.
William E. Brown is a former president of the National Association of Realtors, co-founder of Springhill Real Estate Partners and founder of Oakland-based Investment Properties.
Daniel Wagner is senior vice president of government relations for The Inland Real Estate Group of Companies. He is past president of the Chicago Association of Realtors.
