After surviving the generational downturn, we have recovered. We are watching the news and trends as you are, and we know we are due for some correction. Therefore, we are forecasting a slower pace of growth for 2019. We are closely tracking our metrics to give us clues to the future, but we see the fundamentals in the Mid-Atlantic are strong. Welcome, Amazon.
The general public and professional practitioners do not know how close we came to losing 1031 exchanges in the last tax reform, even though tax-free exchange of property has been in the tax code since 1921. For several years we have been on the board, a past president and part of the government affairs committee of the Federation of Exchange Accommodators (FEA), the national association of 1031 exchange Qualified Intermediaries. During 2016 and 2017 FEA voluntarily spent many hours walking the halls of Congress lobbying to protect 1031 exchanges. We are humbled to have worked with a small team of truly dedicated professional Qualified Intermediaries from across the country along with genius lobbying direction to keep 1031 exchanges for real estate in the tax code. We cannot thank them enough!
As part of implementing tax reform, Congress gives Treasury the job to provide regulations interpreting the new law. A new component of the tax law, 199A, provides pass-through businesses the ability to deduct 20% of their qualified business income if they meet specific parameters. Depending on an income threshold, rental real estate owners will use a formula that involves the unadjusted basis immediately after acquisition (UBIA) of qualifying property to determine if they get the deduction. In August 2018 Treasury issued a proposed regulation that did not help real estate owners who do 1031 exchanges. The Federation of Exchange Accommodators (FEA – we are on the board) and other real estate industry groups aggressively weighed into Treasury to provide an alternative “step in the shoes” treatment for real estate owners who do 1031 exchanges.
The final Treasury regulations adopt the suggested “step in the shoes” treatment. The “step in the shoes” treatment takes the basis of the relinquished property at the time it was originally acquired. Additional investment in the replacement property at the time of the exchange increases the original relinquished property UBIA. The examples in the final regulation are clear and cover transactions where the price of the relinquished property and acquired property vary, and there is cash out and boot. The “step in the shoes” approach is workable and indeed a significant improvement over the proposed regulation.
In October 2018 Ed Horan submitted commentary (https://bit.ly/2RAYyYs) requesting Treasury clarify that rental property owners will qualify for the new 199A deduction. His comments were also picked up by TAX NOTES, a national tax news service.
With the final 199A regulations, Treasury also issued Notice 2019-17 (https://bit.ly/2R1nenN) which is a proposed revenue procedure that provides for a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of the new section 199A. Treasury acknowledged the issue is the subject of uncertainty for some taxpayers. Glad they are listening to Ed Horan!
there is plenty
of chatter and hype about investing in Qualified Opportunity Funds (QOF) to defer real estate capital gain. The Qualified Opportunity Zones (QOZ) and Qualified Opportunity Funds (QOF) were created in TCJA legislation a year ago, but there are still many unanswered questions.
In many cases, the 1031 exchange remains a better way to defer real estate capital gain. Real estate investors need to understand QOF limits and risks clearly.
An excellent article by real estate attorney Matthew Rappaport is at:
Realty Exchange highly recommends the 15th edition of Every Landlord’s Tax Deduction Guide, written by Stephen Fishman, J.D., and published by NOLO. Get a copy here.