The 1031 rule enables investors to defer the payment of capital gains by reinvesting income in similar properties. A large number of commercial real estate transactions, and therefore commercial real estate loans, are related to this rule.

The 1031 rule is a provision which greatly benefits the real-estate industry in particular, by encouraging commercial real estate owners to reinvest in similar properties . It allows commercial property owners to defer paying capital gains taxes on income earned from their properties. For example, the owner of an apartment complex achieves a $10 million profit. That same owner can avoid paying taxes immediately by reinvesting the profits in another apartment building. 36% of all investments under the 1031 rule are related to real estate.

The real estate industry feared the proposed elimination of the 1031 rule included in the initial drafts of the Republican tax bill. The proposed changes were meant to finance tax cuts and proposals to offset the negative impact of the rules elimination were gradually dropped as the Republican bill took shape. Both sides of the aisle viewed the 1031 rule as mere loop hole, which simply offset future tax payments. “It’s really become just a way to defer tax liability,” said Mark Mazur a former top tax official at the Treasury Department under the Obama administration. The elimination of the rule could have provided immediate financing for tax cuts, but perhaps politicians were unaware of the negative impact such a change could have on the real estate industry.

The number of commercial real estate transactions and therefore commercial loans would have steeply declined had the rule been eliminated.

Like exchanges related to the 1031 rule account for between 10 and 20% of all commercial real estate transactions. No doubt these transactions would have stopped under the initial Republican proposals. The specialized industry dedicated to investment in these like properties would also have gone extinct under the initial Republican plan. Elimination of the 1031 rule could have negatively impacted the entire economy, as construction projects related to the rule would have stopped overnight. Simply put a large amount of real estate investment would have stopped if the 1031 rule had been fully eliminated.

The final bill did not eliminate the rule, but simply limited its scope. Commercial real estate lending won’t be greatly impacted.

Fortunately for commercial real estate, changes to the 1031 rule under the recent law do not target the industry. According to the Journal of Accountancy 1031 exchanges will now be limited to property not primarily held for sale. IRS code defines “ property not primarily held for sale,”as property held for any purpose other than resale. Under the new law investors can still defer paying taxes on real estate income by investing profits in other properties. Real estate investors who wish to take advantage of the 1031 rule will simply have to hold onto properties for a longer period of time.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage