April 7, 2017
By Louis Rogers, president of Capital Square 1031
Last year, the Congressional Republicans proposed a sweeping overhaul of the Internal Revenue Code that would essentially repeal Section 1031 along with the deduction for business interest. A key provision would allow taxpayers to expense (write off) 100 percent of their depreciable basis in the year of purchase.
As described in part one of my call to action, expensing of business assets has the potential to jump-start the economy to create jobs and economic prosperity; expensing of real estate will not create jobs, costs the Treasury billions of lost revenue, may have adverse unintended consequences, and is not supported by the real estate industry. The simple solution is to exclude real estate from any expensing legislation.
The following example will illustrate the point: Taxpayer purchases a newly-constructed property that is triple net leased to a large, investment-grade company for 20 years.
Taxpayer pays a purchase price of $1,000,000, with $900,000 allocated to depreciable assets and $100,000 to non-depreciable land. Taxpayer puts $250,000 down and borrows $750,000 of the purchase price from a commercial lender. The property generates a 5 percent net return (flat for 20 years) or $50,000 per annum in taxable income (tenant pays all expenses under the triple net lease).
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