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Impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on 1031 Exchanges

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During much of 2017, there was a growing concern among many real estate investors that efforts to reform taxes would result in a loss of 1031 Exchange benefits. This belief was fueled by comments from both Republicans and Democrats who were expressing that the 1031 Exchange had turned into a tax loophole for wealthy and was no longer providing a net positive benefit to the economy. Many politicians on both sides of the aisle were expressing the need to bring in more tax revenues from winding down 1031 tax deferrals.

Supporters of the 1031 Exchange cited research showing that if the exchange was eliminated there could be a short-term drop in investment property values ranging from 4.66% to 8%. This reduction would more than offset projected added tax collections of less than $500M per year for the Treasury.

In the final legislation enacted on December 22, 2017, a significant portion of the 1031 Exchange tax code pertaining to real property survived – much to the great relief of not only real estate investors, but to the large number of real estate professionals who support the industry including qualified intermediaries, accountants, lawyers, real estate agents, among others.

Not fairing as well, the portion of the 1031 Exchange relating to personal and business property, e.g., machines, equipment, furnishings, airplanes, art, collectibles, and intangibles — was eliminated. A brief panic set into some industry sectors that relied on these tax benefits, but the overall feared consequences were blunted by other provisions of the Act that permitted accelerated expensing of many items that under the previous provisions were only allowed to be depreciated over a longer time period. The TCJA made substantial changes to depreciation and expense deductions that are outside of the scope of this book to summarize. In general, the overall impact of these changes has been viewed to be favorable for real estate investors – although there is much complexity that will likely require the resources of a qualified tax advisor to interpret and implement on behalf of their clients.

In contrast to the previous major tax reform which was introduced in 1986 after almost two years of back and forth negotiation, the 2017 tax reform was completed in about 22 days. Many CPAs and tax advisors are still scratching their heads to interpret sections of the new reform, and it is likely that further updates will be issued to clarify. As always, readers should rely on the advice of their tax advisors to best determine how TCJA may impact their situation.

Disclaimer

There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.