It has been since 1986 that significant changes to the tax system have not been made, but a plan proposed by Republican lawmakers for 2017 would change all that. When the smoke clears, will the commercial real estate sector be able to say it survived?
We must take the lead on these tax reform issues and work to preserve Section 1031.
It is currently unknown how the recent tax adjustment will affect the real estate market or the economy. As a sector, the commercial real estate industry is at risk of collapsing under the weight of forthcoming tax reforms; thus, we need to remain conscious of this risk and take steps to mitigate it.
The Tax Plan Under Consideration
Titled “A Better Way,” the proposal proposes numerous alterations, several of which would have far-reaching effects on the commercial real estate market. Among these is the classified carried interest as ordinary income for tax purposes and the end of property depreciation. Investors’ tax burden would rise between 19.6 and 13% due to the proposed modifications to carried interest structures. In real estate, however, there is a wide variety of partnership structures, carried interest structures, and investment hazards. Given the complexity of the subject at hand, any proposed changes to carried interest should be treated with the same nuance. If the change is implemented, it might significantly impact real estate joint ventures and partnerships.
The Removal of 1031 is a Hard Blow to CRE Industry
The planned removal of Section 1031 of the tax law is one of the most pressing issues and would have a devastating effect on the business sector. It would place the industry toward a higher cost of capital, lower investment rates, more extended asset holding periods, less transactional activity, and other adverse outcomes. As a result, the real estate industry would collapse, disrupt local property markets, tenants and owners will suffer, and some could lose jobs.
If 1031 exchanges are no longer permitted, the commercial real estate sector will be subjected to devastating repercussions.
The real estate market and the economy as a whole take a severe hit from this. There might be a $131 billion drop in GDP in the United States over a decade, according to an analysis done in 2015 by Ernst & Young. According to the same analysis, there would be a long-term loss of $1.4 billion in labor income and a decrease in the investment of $7 billion.
The Unanswered Questions
Significant problems arise with the repeal of Section 1031 and the current state of tax reform. Could this have an impact on other markets? Is there a chance that this could cause our economy to contract? What adverse effects does this have on new and upcoming companies? Will reduced tax rates eventually mitigate these adverse effects on the economy? We have no time to lose if we want to find out the answers and have our voices heard. Therefore, we need to keep asking these questions.
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