Proposed tax changes make it wise to sell any commercial real estate properties now if you are considering selling in the next couple of years in order to take profits, advised John Chang, senior vice president and national director of research services at Marcus & Millichap.
“Get it in motion today,” stressed Chang in a video on the company’s website.
Speed is of the essence because the Biden Administration proposal to set a $500,000 cap on 1031 tax-deferred exchanges would inhibit the ability to put gains from the sales of existing properties into new commercial real estate investments, Chang pointed out.
Estimates are 10% to 20% of commercial real estate transactions involve 1031 exchanges.
Scott A. Johnson, chair of Eastman & Smith’s real estate practice group warns that an end to the 1031 deferral would likely reinforce a slowdown, as it would “further encourage an investor to hold real estate investments in hopes that the capital gains rate is reduced by a future administration.
To try to stop the proposed 1031 change from happening, Chang urged stakeholders to lobby their Senators and Representatives at this site. Created by the Federation of Exchange Accommodators, a member of The Real Estate Like-Kind Exchange Coalition, the web page offers talking points for correspondence and conversations.
Chang added proposed changes to increase the capital gains rate to that for ordinary income for those making $1 million and more could raise the hit for these investors to 39.6%.
If enacted these changes, including proposals to eliminate the stepped-up basis and to tax carried interest as ordinary income could change the real estate landscape for years to come, Chang predicted: “Investors need to keep their eyes on the horizon.”
He said there likely won’t be time to reposition assets after changes are made.