M id A tlantic Real Estate Journal — Owners, Developers & Managers — March 19 - April 15, 2021 — 7A
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O wners , D evelopers & M anagers
he ability of President Joe Biden to pass sweeping economic reform hinges By Daniel P. Collins, Withum Biden Presidency: Implications of Proposed Tax Law Changes for the Real Estate Industry T
as much as $25,000 of rental losses as nonpassive losses. This means the individual can deduct up to $25,000 of rental losses from nonpassive income, such as sal- ary, dividends and interest, but this treatment completely phases out when the investor’s modified adjusted gross income reaches $150,000. To qualify for the special allow- ance, the investor must (a) actively participate in the operations of the rental property at all relevant times and (b) own at least 10% of the value of all interests in the activity throughout the year. If this special deduction were re- voked, it could reduce an investor’s available cash flow and therefore
increase; 3. Average holding periods would increase; 4. The velocity of investment in the economy will decrease; 5. Rents will rise; and 6. The economy will contract. Commercial and residential owners looking to dispose of a property in the near future should closely monitor President Biden’s tax policies. Without Section 1031 tax advantages, capital expendi- tures for the next property may be substantially less. If an individual is not a real estate professional, a special rule allows the investor to categorize $25,000 Passive Loss on Real Estate Rental
the ability to purchase additional real estate. The nondeductible losses would continue to accumu- late as passive loss carryforwards until the rental property produces income or is sold. Conclusion President Biden’s repeal of Section 1031 exchanges and the $25,000 passive loss allowance could be harmful to the real estate industry and conflicts with some of the stated goals of tax reform. These so called “loopholes” are the essential incentives that stimulate transactional activity for a healthy and strong real estate market. Daniel P. Collins, JD, LLM is a Real Estate Team Member at Withum.
undoubtedly increase tax revenue for federal and state governments initially, but it could also adversely affect the same in future years. There are a number of adverse consequences to a repeal of Sec- tion 1031 exchanges, including a decrease in reinvestment in com- mercial and residential real estate, greater use of leverage, downward pressure on employment (especial- ly in related sectors) and decreased benefits for local governments. A study by Ling & Petrova con- firms the negative trickle-down effects to multiple construction and real estate markets. Some key findings from the report: 1. Real estate values would drop; 2. The cost of capital would
on his ability to increase tax revenue. Pres- ident Biden has stated he will increase r e v e nu e b y c l o s i n g t a x loopholes for wealthy Amer- icans. Many of
Daniel P. Collins
the “loopholes” President Biden seeks to close could significantly affect the real estate industry. President Biden’s proposed tax plan considers ending two very im- portant and longstanding benefits to real estate investors: 1. Elimination of tax deferrals from a 1031 exchange of property 2. Elimination of the $25,000 exemption from the passive loss rules for rental real estate 1031 Exchanges Section 1031 of the Internal Rev- enue Code was first enacted as part of The Revenue Act of 1921 and, after adjustments in the 1950s and 1980s tax reforms, reached its final present day form via the Depart- ment of the Treasury rules and regulations effective July 2, 1990. The main advantages for own- ers/operators in commercial real estate markets are deferring tax li- abilities and increasing the invest- ment capital available to invest in similar or larger projects. In 2019, the Joint Committee on Taxation (JCT) estimated a $9.9 billion tax revenue loss because of commercial real estate like-kind exchanges. The JCT estimates this loss will accumulate to $51 billion during 2019 to 2023. President Biden seeks to repeal Section 1031 exchanges to reduce the estimated $9.9 billion loss. The deferral of tax liabilities into the unforeseen future places an extreme strain on revenue for federal and state governments already strapped for cash. COVID has only increased the deficit of state governments with reductions in sales tax revenue. The repeal of Section 1031 exchanges would Larken Associates debuts new office for growing in-house construction team BRANCHBURG, NJ — Larken Associates, a regional leader in commercial and resi- dential real estate building, de- velopment and management, announces the completion of a new 4,300 s/f office space for Core Enterprises, the com- pany’s in-house full-service construction team, located at its HQ at 1250 Rte. 28 in Branchburg. MAREJ
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