Everyone Fears the End of the World
I don’t know if anyone else saw the irony in it, but I had to chuckle when I read that Zoom is calling its workers back to the office for the first time since the pandemic.
First, let me assure you that the world is not coming to an end. Last month, I thankfully celebrated being on this earth for 62 years and further celebrated 37 years of being happily married, 38 years of being a commercial real estate broker and 7 years since two life threatening incidents. It’s also 40 years since the 1983 recession, 36 years since the 1987 recession, 27years since the 1996 recession, 22 years since the .com bubble burst, 16 years since the 2007 great recession…anyway you get my point…these things pass, as will whatever we face in the future.
Commercial real estate has been filled with ups and downs in 2023, and plenty of challenges. Interest rates are on the rise, regional banks are in disarray and office remains in turmoil. Disruption is the new normal. And wait, yes, we are entering an election year. Despite the disruption and turmoil, we at CDC stand ready to embrace opportunities that accompany these fast-changing economic conditions and the impact they have on the supply and demand for commercial real estate.
Although everyone might be feeling the end of the world, we all must realize that we someday will face the end of our life (I’ve already burned 2 of my 9 lives!). However, if you want the last laugh at the end, you should be very careful and use the tax code 1031 – also known as tax deferred exchanges. I prefer to say, “Defer till you die, refi to live.” In short, so long as you follow the time rules (45 days to identify/180 days to close) and you buy properties greater in value and with equal or greater debt, you don’t have to pay any taxes. But here is the kicker, when you die there is a step up in basis and your heirs don’t have to pay any of the taxes – too bad you have to die to implement this strategy!
An area that we find investors not aware of is called depreciation recapture. Most people have held property long enough (1 yr +) that their gain is a long-term capital gain (taxable at 15% or 20%). What many don’t realize or understand is that there is also a tax on the depreciation recapture (so all that depreciation you took to shelter income, comes back to be taxed when you sell.).
When real property is disposed of in a taxable sale, the total amount of straight-line depreciation taken by the taxpayer, up to the extent of gain recognized in the sale, is taxed as ordinary income (up to 25%). In other words, the tax benefit during the taxpayer’s ownership of the property is recouped, or “recaptured,” by the IRS. Additional depreciation is recaptured at the applicable income rate, without a 25% cap.
In a 1031 exchange, depreciation is recaptured to the extent the value of depreciable property acquired as replacement property is of a lesser value. What this means is that when utilizing a 1031 exchange, a taxpayer must acquire real property of equal or greater value to the property sold, and the property must also contain depreciable property (i.e., improvements) of equal or greater value to the depreciable property sold, in order to defer both capital gains and avoid depreciation recapture.
It is important for taxpayers to be aware that they can fully defer their capital gains by acquiring property of an equal or greater value to the property they sold, while not deferring all of their depreciation tax liability, because the replacement property did not have a sufficient value of depreciable property. In other words, depreciation recapture can trigger tax liability, even if a taxpayer acquires like-kind property of an equal or greater value to their relinquished property in a 1031 exchange.
One of the most important takeaways is that an investor can have a taxable event when completing a 1031 exchange, even if they reinvest all their proceeds and buy up in value, because their transaction triggers depreciation recapture. Most often, this is seen where a taxpayer exchanges out of improved property, into unimproved property that has no depreciable improvements (i.e., vacant land). In such a case, there may be depreciation recapture, depending on the type and amount of depreciable property that was owned as part of the relinquished property. It is essential that when planning a 1031 exchange, investors consult with their tax advisor early on in the process to analyze their tax liability, and what replacement property must be acquired in order to fully defer all gains (both capital gains and depreciation).
So, in short again, “Defer till you die, refi to live.”
Nick’s Numbers
领英推荐
As the campaign rhetoric increases on our trade relationships with China, we will continue to see an increase in U.S. imports from Mexico. U.S. imports from Mexico have surged since early 2022 thanks to tariffs doubling on Chinese goods and the signing of the USMCA in 2018. Since February of 2023, U.S. goods imported from Mexico have exceeded imports from China. This is great news for all San Diego real estate markets. Here is a chart to illustrate my point.
If you would like an analysis of your properties’ value or discuss what you should be doing with regard to interest rates or inflation and their impacts on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100,?[email protected]).
Well two things are rising in commercial real estate. One, cap rates. We have now seen three consecutive quarters of rising cap rates. This is the first time since the Great Recession and a sign that investors are requiring higher yields to purchase a property. The second thing increasing is tenant improvement allowances. First, costs for labor and materials are higher and with more vacancy landlords are having to dangle larger allowances to attract tenants to rent space.
As we approach the opening of college football season, I have really enjoyed watching Deion (Neon Deion) Sanders approach the turnaround of the University of Colorado football program. The NFL legend has kicked a bundle of players off the roster and recruited dozens more.
His reason? “They didn’t love football. It is hard to be effective if you don’t love it, if you don’t want to live it. That’s tough.” He added that a number of his former players had “dead eyes,” indicating their love of the sport was gone. Let me just tell you, there are no “dead eyes” at CDC and when the going gets tough, the tough get going.
I hope you enjoy the rules of getting old…
21 Rules for a?Good Old Age
AND REMEMBER: Life is too short to drink cheap wine.
President at 1st Commercial Management Group-San Diego, Inc. & West Coast Retail Management, Inc.
1 年Always a good read Don! Thanks!
Always in the market
1 年I don’t know Don I might have to listen to AOC. She thinks we are closer to the end.??