A vital tool in rebuilding our American economy is at serious risk under the US $ 1.8 trillion family plan under consideration in Washington – and the damage will be felt in every state, city, and town that are still affected by the ravages of COVID-19.
We have seen countless malls, malls, and restaurants shut down here in Detroit and across Michigan due to the pandemic. The fallout continues in hotels and office buildings. Virtual meetings will permanently replace significant business travel and many people will work exclusively from home.
In order for the economy to regain its strength, considerable reinvestment is required to convert this property and to develop new commercial space.
Over the past 100 years, investors have used 1,031 similar exchanges to defer taxes on property sales when the proceeds are reinvested in a new property. Section 1031 can continue to bring vital capital to the revitalization of the Detroit communities; However, the $ 1.8 trillion plan put forward by President Joe Biden suggests capping the amount of profits that can be deferred to $ 500,000.
This short-sighted and counterproductive cap would mean economic stagnation, not recovery, for Michigan’s economy.
The Federation of Exchange Accommodators, the national organization of 1,031 exchange companies, analyzed data from 7 companies in Michigan between 2015 and 2019 and found:
â–º 3,324 properties were involved in stock exchanges;
â–º These properties are valued at $ 5.8 billion;
â–º These transactions generated $ 50.1 million in state and county transfer taxes and recording fees.
â–º In addition, Michigan property sales have removed the revaluation cap, allowing the local community to raise the property’s valuation to more accurately reflect its current value, resulting in additional property tax revenue.
This is only part of the market as there are many more companies out there making it easy to share. Nationally, it is estimated that 15-20% of all commercial transactions involve a 1031 exchange, and at least 50% of the transactions my company has completed in the past year would not have occurred without the opportunity to exchange.
Similar exchanges are promoting the rehabilitation of distressed commercial real estate, financing the construction or renovation of apartment buildings and affordable housing, and enabling businesses to move to larger facilities – all activities vital to Detroit’s economic recovery.
A 2017 national macroeconomic study by Ernst & Young, recently updated, concluded that restricting or removing section 1031 would shrink GDP.
The study also forecast the benefits of 1,031 exchanges in 2021 and concluded that, at the national level, these transactions would:
â–º Support 568,000 jobs, equivalent to a labor income of $ 27.5 billion;
â–º Generate $ 6 billion annually in federal taxes from lost depreciation on replacement properties;
â–º Add $ 55 billion to GDP.
The $ 5 billion generated from jobs in a year alone far exceeds Biden’s budget estimate that capping these exchanges at $ 500,000 averages $ 1.95 billion a year is increased over 10 years. Why would anyone change section 1031? It doesn’t make any money.
A restrictive cap on the ability to reinvest in Michigan’s economy – whether $ 500,000 or some other amount – at this critical point in time would spin an already ailing commercial real estate market.
The best way to encourage improvements and strengthen our infrastructure inventory is to keep the section 1031 exchanges unchanged.
Burt S. Kassab is a shareholder in Kullen & Kassab, PC. He leads the firm’s Real Estate, Corporate, and Transactional practice and served as the Vice Chairman of the Bank of Michigan’s Board of Directors for over 10 years. Daniel Wagner is Senior Vice President of Government Relations at The Inland Real Estate Group of Companies. He is a past president of the Chicago Association of Realtors.
