M id A tlantic Real Estate Journal — Owners, Developers & Managers — Professional Services — November 19 - December 23, 2021 — 7C P rofessional S ervices
www.marej.com
By Richard J. Brunelli, R.J. Brunelli & Co. 1031 Like-Kind Exchanges Appear to be Safe —For Now
ommercial real estate pros breathed a sigh of relief on October 28 when a p r o p o s e d $ 5 0 0 , 0 0 0 cap on Sec - t i o n 1 0 3 1 l i k e - k i n d ex change s disappeared from a new f ramework for the Build Back Better plan. Congressional Democrats could still try to resurrect the proposal, but real estate lob - byists believe the provision is effectively dead. It lacks the votes to be added back into the plan. By speaking out against the changes, the industry appears to have won an im- portant victory. (That sound you hear is me knocking on wood in hopes that nothing changes.) Unexpected Upside Challenges always bring opportunities. The threat to 1031s appears to have yielded an unexpected upside: The defense of the program made far more people aware of its beneficial, cascading effects on real estate, the economy and government coffers. For example, Ernst & Young re - search conducted on behalf of the Federation of Exchange Accommodators finally quan - tified the cottage industry that 1031s support—con - struction contractors, civil engineers, title professionals, lawyers, real estate analysts and other professionals. According to that data, this year alone Section 1031 like- kind exchanges will: • contribute 568,000 jobs and $27.5 billion in labor income to the economy; • add $55.3 billion to the GDP; • generate about $8 billion in federal, state and local taxes, and • spur an additional $6 billion in income tax revenue (from foregone depreciation, or reduced deductions, on replacement properties). Upward Spiral A $500,000 cap would have decimated the incen - tive structure that drives these transactions. As any retail broker can tell you, properties like freestanding drugstores routinely yield C Richard Brunelli
gains far higher than that cap. On one drugstore deal, my 50-50 investment partner and I took a $2 million gain, combined it with the original $2 million from the purchase of that drugstore, and put a down payment on a $14.5 million shopping center. We upgraded that property and its tenants, adding value to numerous stakeholders, in - cluding the local community. Retail real estate is still recovering fromCovid. While the situation has improved dramatically since the initial
onset of the pandemic, many retailers, service tenants and restaurants are only just now adapting to new consumer behaviors. Some still have not paid their lockdown-era rents. The 1031 cap proposal would have hit landlords especially hard given these realities. Long term, this change would have put an end to the virtuous circle that encourages those who buy 1031 properties to fix them up, bring in new ten - ants and otherwise add value to them.
Of course, 1031 exchanges eventually could come under attack yet again. A certain seg - ment of this society will always see economic incentives such as these as “unfair.” Some - how, the billions of dollars in taxes that retail real estate produces never figure into this worldview. Nor do the jobs and community improvements that arise from this activity. In addition to patting your industry representatives on the back for a heroic lobby - ing effort, stakeholders in our industry should continue to
do their best to stay informed and on guard about regulatory changes that restrict economic activity. The century-old 1031 like- kind exchange program ap - pears to be safe for now. But stay vigilant—the next threat could be just around the corner. Richard J. Brunel l i is Chairman of retail real estate brokerage R.J. Brunelli & Co., Old Bridge, NJ. He has also owned and sold multiple properties through 1031 exchanges. MAREJ
RJ Brunelli & Co | 400 Perrine Road Suite 405 Old Bridge, NJ 08857 | Phone: 732.721.5800 | www.rjbrunelli.com
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