![]() |
Image Attribution: www.AvenueRealtyGroup.com |
One of the
first questions we are asked by owners of commercial real estate contemplating
a sale of their building – what will we do with the money?
You see, upon the
sale of a commercial real estate asset – an office building, industrial plant,
retail strip center, apartment complex, unimproved land, etc. – the tax man is
seated at your dinner table. In fact,
several tax men – state and federal – want a taste.
Briefly, this “taste” can
consume close to half of the sale proceeds once capital gains taxes,
depreciation recapture, affordable care act percentage, and state taxes are
deducted. Ouch! That's a big bite.
So, you may
be asking – why would anyone sell if faced with half the sale proceeds going
bye bye? Good question. Enter the 1031 tax deferred exchange.
Since 1921, tax
deferred exchanges have allowed owners of income producing real property to
defer the taxes a sale would create. Through a widely used mechanism, the seller
may purchase a “like kind” income property and defer the gain.
The process is
fairly simple so long as certain rules are followed – a period of time is
allowed to identify and purchase the new property or properties, a middleman
called a qualified intermediary must affect the exchange, and you must spend an
equal or greater amount of the property you sold. Easy, right? In fact it is,
and thousands of small businesses and investors employ the strategy each year.
A
tremendous amount of transactional volume is created which results in a great
economic driver. Benefiting from tax deferred exchanges – in addition to small
businesses and investors – is a cadre of brokers, escrow holders, qualified
intermediaries, title companies, accountants, attorneys, contractors, lenders,
building inspectors, environmental engineers to name a few. I once calculated, approximately
sixty people touch a transaction of this sort. Amazing!
Storm clouds
are starting to rumble on the horizon, however. Several proposals now massing
in the sub committees of Congress, include an elimination or a drastic gutting
of 1031 tax deferred exchanges. I can hear the collective cries of – Noooo!
But, it could really happen. As suddenly as a clap of thunder, these umbrellas
of tax deferral and drivers of economic activity could be gone.
What can be done? Let your elected officials hear from you. You
might even invite them to dinner.
No comments :
Post a Comment