1031 Exchanges and Opportunity Zone investments both offer compelling tax advantages, but one or the other may be far better suited to an investor’s individual circumstances. Further, both options continue to evolve, with new regulation and changing requirements creating opportunities for those investors who have the most up-to-date information.
So, how do you decide which investment solution is right for you?
On Tuesday, Sept. 29th, JTC Americas, Formerly NES Financial, hosted a webinar on tax-advantaged investments with industry leaders about the pros and cons of a 1031 Exchange, Opportunity Zone fund, and more.
Prior to the webinar, we spoke with our guest panelists, including Moderator Justin Amos, about the upcoming presidential election. Read what Jean-Louis Guinchard, Managing Principal of RCX Capital Group; Daniel Wagner, SVP Government Relations of The Inland Real Estate Group; Edward J. Hannon, Shareholder of Polsinelli; and Frank Eichenlaub, Counsel of Polsinelli, had to say below.
“How do you think the upcoming election will impact 1031s and Opportunity Zones?”
Justin Amos: This upcoming election brings a lot of uncertainty. It comes at a time where I think all of us are looking for some sense of normalcy and definitive direction. Throughout COVID-19 we have seen the evolution of how people interact, how businesses operate and how we as a society persevere through times of hardship. One of the things that has impressed me most during this time is the innovative nature that has been displayed throughout all industries.
Focusing on the real estate sector, we have seen shift in demand by the investor for an asset class type that is pandemic resistant. While many cash real estate investors have been patient due to the effects of COVID-19, 1031 exchange buyers have actually driven most of transaction volume. The 1031 exchange has helped create new opportunities and stabilize pricing. Opportunity Zones will play a significant role moving forward as well. A program designed to rejuvenate communities by bringing capital to these targeted areas is an extremely powerful investment vehicle.
As we work towards a post-pandemic way of living, both these investment programs have the ability to help recuperate communities that have been affected from the economic downturn. It is without certainty how the election will impact both of these investment programs, but I think it is important we evaluate through a holistic lens before we make any changes.
Daniel Wagner: It is our job as Commercial Real Estate Professionals to reach out to as many members of Congress a possible (especially Democrats, who currently control the House Ways & Means Committee, and who may support candidate Biden’s campaign proposal to eliminate Section 1031). We must educate and explain why so many of their predecessors thought they could use the elimination of Section 1031 to pay for programs, but after being educated came to the realization that Section 1031 is too important of an economic engine particularly in terms of supporting jobs – especially trade labor jobs in the commercial real estate industry. This is not a question of politics or party. Rather, this is a question of sound, common sense policy, and we need to speak up now for a vital part of our tax code that has been an anchor to our economy and a job creator for the last 100 years.
Ed Hannon: Regardless of how the election turns out, I believe that there will be a continuing attack on 1031s. Continued vigilance by the FEA and other constituencies will continue to be required to raise awareness on the adverse effects that a full repeal of 1031 would have on the real estate industry. However, until that time, I expect the DSTs will continue to thrive based upon the ability to make opportunistic purchases of distressed properties that need to be recapitalized.
With respect to Ozone, I anticipate that this program will continue and possibly enhanced regardless of which party controls congress and the presidency
Jean-Louis Guinchard: While it is still very early to tell, the upcoming election, particularly if Biden wins and the senate changes to a Democratic majority, could have a significant impact on 1031 exchanges. We do not believe the upcoming election will have a significant impact on Opportunity Zones.
Biden, the Democratic presidential nominee, has proposed eliminating 1031 “like-kind” exchanges for investors with annual incomes greater than $400,000 as part of his plan to finance $775 billion in government spending over the next 10 years on child care and care for the elderly. The details, however, of Biden’s tax plan are very sparse and efforts to eliminate 1031 exchanges have been made before. The proposed changes are due entirely to a lack of understanding of the benefits of 1031 exchanges and positive impact these have had, and will continue to have, on the economy (please see the following link), particularly, interestingly enough, to residents of states that could ultimately decide the presidential election. Eliminating 1031 exchanges at a time when the real estate industry is under considerable stress from the Covid-19 virus could also be a significant blow to the economy. Once lawmakers understand and/or recognize the above, we believe that the current plan could very well change.
With regards to Opportunity Zones, we do not believe that there would be any material changes irrespective of who wins given the significant bi-partisan support for the current legislation and positive impact these have had on economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.
Frank Eichenlaub: In light of the numerous other significant issues facing our nation at this moment, it seems unlikely that the winner of the upcoming election – whether it is President Trump or Vice President Biden – will eliminate or change 1031s.
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