COMMENT: A recipe for economic stagnation


A vital tool to rebuild the commercial real estate economy of Las Vegas and Nevada – still reeling from the ravages of COVID-19 – is at serious risk under the $ 1.8 trillion U.S. plan for families being considered in Washington .

The $ 1.8 trillion plan presented by President Joe Biden proposes to cap the amount of deferred gains from the sale of property at $ 500,000.

This shortsighted and counterproductive ceiling is a recipe for economic stagnation, not for recovery.

Over the past 100 years, similar type exchanges under Section 1031 of the Internal Revenue Code have allowed sellers of commercial properties to defer taxes when the proceeds of the sale are reinvested in new properties. This reinvestment tool has been a cornerstone of the US commercial real estate market, generating economic benefits at all levels that far exceed the amount of deferred taxes.

Every community across the country, including here in Las Vegas, Reno, and the rest of Nevada, has witnessed countless shopping malls, strip malls, and restaurants shut down due to the pandemic. The fallout continues in hotels and office buildings. Virtual meetings could potentially permanently replace major business travel, and many people will work exclusively from home.

A substantial effort to reallocate these properties and redevelop commercial spaces will be necessary for the economy to regain its strength. Voluntary investors would be crippled without the ability to defer taxes and reinvest in commercial properties.

The 1031 Stock Exchanges provide fundamental liquidity to real estate, stimulate the redevelopment of distressed properties, finance the construction and renovation of multi-family and affordable housing, and generate significant revenue for state and local governments through property taxes, property rights. transfer and registration fees. And it’s critical to stress that a 1031 exchange is a deferral, not tax avoidance or elimination, as taxes are paid over a 15-year window.

The Federation of Exchange Accommodators, the national organization of 1,031 brokerage firms, analyzed data from seven Nevada companies between 2015 and 2019 and found 6,827 properties involved in exchanges that generated $ 56.1 million in taxes. state and county transfer fees and registration fees. This is only part of the market here, as there are a lot more companies making trading easier.

A recently updated 2017 macroeconomic study from Ernst & Young concluded that if Section 1031 was limited or repealed, it would reduce GDP. The study further projected the benefits of 1,031 exchanges for 2021 and concluded that nationally, these transactions will support 568,000 jobs, representing $ 27.5 billion in labor income and generating $ 5 billion in federal income taxes; generate $ 6 billion annually in federal taxes through lost depreciation on replacement properties; generate $ 2.8 billion in state and local taxes; and add $ 55 billion to GDP.

The $ 5 billion generated by jobs in one year far exceeds the Biden 2021 budget estimate which indicates that the cap of $ 1,031 to $ 500,000 increases on average $ 1.95 billion per year over 10 years. Why would anyone change section 1031? It doesn’t bring in any money.

In addition, all capital gains are paid at the end of the investment within a window of approximately 15 years. Eighty percent of taxpayers make a 1031 and then sell in a taxable sale. It’s a win-win.

The recovery of our economy will have to be generated from many sources, and the private sector must again play an important role in the recovery. The best way to encourage improvements and strengthen this stock of infrastructure is to keep Section 1031 unchanged to encourage investment and, most importantly, reinvestment in the real estate economy.

Kenneth N. Blomsterberg is Senior Managing Director of Investments for Marcus & Millichap in Reno. Daniel Wagner is senior vice president of government relations for The Inland Real Estate Group of Companies.


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