CREJ

September 2020 — Office Properties Quarterly — Page 11 www.crej.com T he Tax Plan proposed by Democratic presi- dential candidate Joe Biden would elimi- nate 1031 exchanges for investors who have ordinary annual income of $400,000 or more. If one assumes this $400,000 cap includes the gain from the actu- al sale of real property, in addi- tion to a taxpayer’s ordinary income earned, the lion’s share of real estate investment prop- erty sales would not qualify for 1031 exchange tax treatment. Even if this assumption—that all earned income would not be combined with the 1031 exchange property gain—the bulk of most real estate sales would likely exceed the $400,000 gain amount. Partnerships, like S corps and C corporations that hold real estate investments, would be pro- hibited from 1031 exchange tax treatment under Biden’s proposed tax plan, as current IRS regula- tions require that the deed title holder is the only entity which can participate in a 1031 exchange. Individual members of a partnership, or share- holders of an S cor- poration, cannot do individual exchang- es for themselves. Significant tax liabil- ities would result for these entities or their passthrough individu- als, such as partners and S corporation shareholders. For C corporations, Biden’s tax proposal increases their tax rate from 21 to 28 percent. Additionally, Biden’s proposed long-term capital gain tax rate would be increased to 39.6 per- cent, virtually D oubling the cur- rent 20% rate. This effectively makes long term capital gain rates equal to ordinary tax rates in his proposal. Adding the state tax rate, depending on where the real estate property is located, a rate of 50 percent or more is conceivable for any investment real estate property sales. And considering the current COVID-19 virus shutdown and aftermath, combined with Biden’s proposed tax increase of the capital gains tax rate and the elimination of 1031 exchanges, the current crippled commercial real estate market could result in the further reduction of cap rates and would cause a major disruption in our real estate market. If that’s not scary enough, another change in the Biden tax proposal is the elimina- tion of the step-up basis for any and all assets acquired from a decedent. If your deceased ancestor partici- pated in a 1031 exchange or held commercial real estate long term that results in a low depreciable base, a sig- nificant amount of the asset’s value would be taxed to you, the beneficiary. Under cur- rent tax regulations, when the decedent’s property is passed to a beneficiary taxpayer, the value of the property is the fair market value at the date of the decedent’s death. In addition, the beneficiary taxpayer is also treated as having held the property acquired for more than a year, ensuring the long-term capital gain treatment for any property disposed of before the decedent’s first anniversary of death. None of these current tax regulations would survive under the proposed Biden tax plan. In light of Biden’s tax plan, is it time for you to review your real estate holdings and get them in order? In your analysis of your current asset holdings, should you consider a 1031 exchange transaction in the near future to consolidate or improve your real estate holding’s returns? Contact the 1031 Exchange Experts nation- wide, toll-free, at 866-694-0204 to discuss 1031 exchange strategies. Or if you have questions about your options, you can also contact us at info@expert1031.com. Our qualified exchange consultants stand ready to assist you. . . . None of these current tax regulations would survive under the proposed Biden tax plan. . . . By Mary Lou Schwab, retired CPA, The 1031 Exchange Expert’s LLC EXCHANGER BEWARE: B iden ’ s P roPosed T ax P lan i mPlodes 1031 e xchanges . . . and more ! Mary Lou Schwab is a consultant and retired CPA with the 1031 Exchange Experts’ LLC, an independent national qualified intermediary. With more than 30 years of real estate tax and escrow experience, her expertise with 1031 tax regulations and the structuring of complex exchanges for partnerships (including reverse exchanges and construction improvement exchanges) has aided her in her own real estate investments. She can be reached at MaryLou@expert1031.com, or nationwide, toll free at 866-694-0204. r e l i a b i l i t y We used to have hundreds of competitors before the hit of these trying economic times. So, where did they all go? Many have jumped ship. Others who were part of larger, more ‘reliable’ institutions, have been shut down. Not us! We are structured to endure hard times so we can be here when YOU need us! We do this because we want your business. Call us! We want to be your 1031 Qualified Intermediary. 8 6 6 . 6 9 4 . 0 2 0 4 E x p e r t 1 0 3 1 . c o m Nationwide, toll-free: