- We are getting close to the end of the calendar year and that often incentivizes investors to close a sale or refinance before year-end.
- There could be further incentive to do so this year because of the uncertainty of the changes a Biden administration will make.
- One of those potential changes is a repeal of the 1031 exchange rules.
We are a week out from the election and Joe Biden will be the next President of the United States. Don’t worry – this will not be a political blog entry. If you want to know more about what I think – as always – call me up and we can grab a beer, pull up a stool, and solve all the world’s problems.
Instead, in this blog I want to talk about some steps commercial property owners may want to take before the end of the year or before the Biden Presidency begins. I will, therefore, discuss refinances, taxes, etc – and whether its important to move on these issues quickly.
End of the Year
Its common in our practice to see companies work to get some deals closed prior to the end of a calendar year. Often this has a lot to do with taxes. This year, that may be further exacerbated because we are having a change in President. As a result, companies may want to make a sale or refinance before the end of the year for the following reasons:
Potential changes in the tax code – I’m not a tax lawyer and its not totally clear to me what general tax changes may happen. As a result, I will leave that to you and your tax person.
Eviction moratorium – As we have discussed previously, as of right now, the CDC has issued a moratorium on many non-payment of rent evictions.* And many municipalities also have a moratorium. Most of these are set to expire on December 31. But will they? Will they be extended?
Uncertainty over 1031 exchange – I discuss this further below, but Biden has previously stated that he may repeal the 1031 tax benefits for like-kind exchanges.
As a result of these, you may want to either sell or refi your commercial real estate before the end of 2020. Obviously we are on a tight schedule to do so now, but if you want to, we are available to help and work to get it closed before year end.
What is a 1031 exchange?
As mentioned above, there has been some talk of Biden potentially repealing the 1031 exchange tax benefit. Many of you know this, but for those that do not, under Section 1031 of the US Tax Code, a seller of real property can delay capital gains taxes if he or she reinvests the money from the sale in a “liked-kind” asset. The IRS has clarified this to mean that any real property is a liked-kind asset for any other type of real property. If an investor, therefore, rolls his or her sale proceeds into a purchase of any other real property, he or she can put off paying capital gains taxes. This is, obviously, a huge benefit to investors.
What Biden is Proposing
As stated above, there has been talk that the Biden administration could potentially repeal this section of the tax code. When describing his tax plan prior to the election, Biden never specifically mentioned Section 1031. But his representatives did say that they could potentially repeal some provisions that are beneficial to real estate investors – “including like-kind exchange issues.”
That, of course, does not mean that Biden will seek to repeal Section 1031. Its been talked about by previous administrations and never been done. And even if he wanted to repeal it, he would still have to get it through Congress. As a result, its definitely something to keep on your radar. And a reason that you may want to consider closing that sale before the end of 2020.
If you have any questions or would like to discuss further, please call us at 512-614-0335.
*Mostly. For further details on what the order requires, please call us at 512-614-0335.