The 1031 rule is a property exchange American rule that allows a property owner to swap one property for another. This rule applies when a property owner uses all the gains from the property’s sale to acquire the new property. The new project must bear similarities with the previous one to paint the image of one replacing one kind of investment with a similar kind of investment. The 1031 rule increases the investors’ purchasing power by exempting them from paying capital gain taxes from earnings made from the sale and replacement of a property. Jaf Glazer is one of the Americas real estate industry experts who acknowledge the importance of the 1031 rule.
Jaf Glazer a real estate advisor, investor, and principal of Gallium, an investment company and founder of Conquest Advisors which offers advisory services on real estate investment matters to high-net-worth individuals and family offices. Glazer is a well sought-after real estate expert for his professional and practical advice. He praises the 1031 exchange rule, for he believes the benefits stretch further than the tax exemptions. He attributes the diversification of assets in the various regions of the United States to the rule. It has made the trading of even significant assets easier with no limit to the number of exchanges an investor can have, the rule has not only paved the way for unbelievable fortunes, it has also incentivized investors to build or renovate real estate that our culture desires and needs.
For nearly a century now, real estate experts across America have been receiving economic benefits from the 1031 rule. Although the current administration has not announced plans to eliminate the 1031 exchange, the government’s desire to eliminate tax breaks for the real estate market and channel the revenues to other priorities is a troubling sign. If the rule was scrapped it would only secure 6% of commercial real estate’s tax revenue lost annually.
What will be the impact if the 1031 rule came to an end have on the economy? The elimination of the 1031 rule will have profound impacts on the American economy. Glazer believes that if the 1031 rule is eliminated the American real estate industry will suffer severe consequences.
Some of the impacts that are likely to hit the sector may include:
- High tax rates for investors selling their properties in the real estate industry will no longer be under the protection of the 1031 exchange.
- Debt financing will rise as the high taxes will deprive investors of the extra money to reinvest immediately after making the sale. Such an environment will leave investors with no other option but to source debt financing.
- High-value property owners and investors may start treating capital gains as ordinary income such as rent as it attracts less taxation.
- Capital investment in the real estate industry will go down due to the reduced transactions amongst investors.
- The emergence of long holding periods as investors will reduce property sale turnover. This reduction will be a direct result of the impact of additional taxes.
The net result is the American economy will suffer as real estate slumps. The amount of money pumped back to the real estate industry due to the tax exemption will no longer be available.