The Real Deal New York

Taking 1031s off the table would have an “atomic-bomb” effect: market players

By Rich Bockmann | February 23, 2015 01:30PM

Federal tax reform could have disastrous effects on the city’s real estate market if it shakes things up too much, industry players said this morning at a panel organized by the Academy for Continuing Education, a residential brokerage school.

1031 exchanges, also known as like-kind exchanges, are crucial to the market’s health, said developer Daren Hornig of Hornig Capital Partners, who joined Cushman & Wakefield’s Bob Knakal, Ian Reisner of Parkview Developers and Josh Schuster of DHA Capital on the panel, which was moderated by The Real Deal publisher Amir Korangy and held at the 3 West Club On 51st Street, home of the Women’s National Republican Club.

“If there was ever an issue with 1031s being taken out of this market,” Hornig said, “I think that would have an atomic-bomb kind of effect.”

The silver lining, according to Knakal, is that “tax reform is such a monumental task that it is not likely to get done.”

“And we hope it doesn’t get done,” he added, “because right now we would rather stick with the status quo.” Knakal said that while Congressional Republicans he’s spoken with favor lowering the corporate and marginal-personal tax rates, power dynamics in Washington could yield concessions on issues like the capital-gains tax, property appreciation schedules and 1031 exchanges – a program that allows sellers to re-invest gains without incurring a tax hit.

On a more local level, the panelists said there are few answers as to how Albany and the De Blasio administration will hammer out the details of renewing 421a when it expires in June. Developers now can combine the abatement with the 80/20 affordable housing program, though there has been talk of shifting that ratio. Meanwhile, tenant advocates are calling for an end to the controversial abatement.

“Is that going to go to 40 percent? Is that going to go to a 60/40 split?” DHA’s Schuster asked. “No one really knows, and it’s only four months until that sunset occurs and we haven’t heard much from the mayor’s office.”

Market-rate rentals in Manhattan really only work with a land basis around $200 per square foot, Hornig said, whereas affordable housing requires a basis somewhere around $20 per square foot, which means that developers need to be incentivized to go the affordable route.

On the mayor’s signature campaign issue to create or preserve 200,000 affordable housing units, Knakal said the plan has yet to produce any cogent details.

“The other day I was at a REBNY meeting and one of his top folks was talking about affordable housing for 45 minutes and all I got out of that speech was 200,000 units,” he said. “And if the mayor wanted 200,000 units or 400,000 units or 500,000 units, he could create them very easily by providing the right incentives for the private sector. With the wrong incentives, nothing will get built and so we’re anxiously awaiting details of what this program is going to consist of. But so far we haven’t gotten anything.”

  • Marie Flavin

    Let Congress know you want to keep 1031s.

  • 1031s heavily distort pricing in the market in favor of holders of time-bomb capital gains that would otherwise be taxed away. It also leads to people paying stupid prices that are otherwise uneconomical, raising prices beyond the market rate which helps to pave the way towards the climax of the boom-bust cycle.

    It would ultimately be better if these taxes exchanges were ended– along with the corporate income taxes that created the demand for this vehicle in the first place.

    Root and branch people, root and branch.

    • it’s not all or nothing…

      Even in run down neighborhoods where developers and buyers need incentives to build/buy? 1031s helped rebuild areas of harlem, williamsburg and LIC that would still be burned out warehouses if not for these.

  • Oouch

    This is a far more sophisticated issue than the comments in the article or below indicate. The encouragement of the ‘family shelter’ that protected ‘primary domicile’ went by the boards under Clinton, since which time we’ve been stuck with the $150k per spouse cap, after which cap gains kicks in. This has had the effect of prodding those whose tax exposure is mounting up into selling in a rising market, or where feasible, transitioning into an ‘arms length’ by changing their ownership to an LLC an renting out their former home for two years or more prior to selling, after which the full gain can be transferred to a ‘like kind’ without any capital gains applying until the final sale, which under 1031 might be never.

    Now, would the elimination of 1031s TAX those properties that are currently held?? Not until they were sold. So in all likelihood the most significant effect would be to ‘freeze ownership’ in the market and diminish a major source of ‘market churn,’ ‘tradeups,’ and sales that generate brokerage fees and lawyer fees. There would be more trust transfer sooner. There would be less sales activity and longer ‘holds.’ There would be a diminished rev. stream from transfer taxes over the long haul, which would hurt the city and state coffers, and there would be possibly an enhanced revenue stream from forced sales and cap gains. But, that is far from definitive.