I fear ye Sacramento
It’s been a while since we last spoke and I wanted to get to what our elected representatives in Sacramento have been up to on their desire to repeal of the IRC Sec. 1031 Tax Deferred Exchanges in Real Estate Transactions. Fortunately, there is no harm done yet as the bill is still in committee as of the last posting date on May 28th 2010.
It has become increasingly obvious that our elected officials either don’t know or worse still, don’t care if we loose all those investment dollars when they place us in such a disadvantaged position of being one of the few states in the union to not match and mirror the Federal Law.
This is not a law change that will effect just the investor’s in the properties. Firstly it will greatly reduce transactions as there is no incentive for investors to leverage the profit from one investment property to a larger one since the the transaction costs and the State Tax will siphon off all the profit. The first causality in this instance is the transfer taxes collected by the counties and some cities on transactions. Next of course is going to sound self serving since I’m a Real Estate Broker, but look at the amount of folks involved in the real estate transaction market here in California… Half of them will have to go, at least!
Now for the obvious… Business doesn’t pay tax, they collect it and forward it, usually including an administration fee for the trouble. Since investment property is owned by investors and administrated by some form of business entity, there is an expectation of profit or return on investment. This means there are going to be some adjustments to accommodate this 10% tax bite into an investors margin. This will have a profound effect in replacement of facilities with new buildings or tenants will have to pay higher rents for functionally obsolete properties. How do you think this will work in the Silicone Valley?
The residential property will be effected just like the retail, office and industrial only over a greater number of investors. Since residential investors tend to be entrepreneurial folks, they’ll look for other places to invest first and avoid the hassle of tenants and toilets for the reduces return. The alternative to all the above is that is a further decline in property values will take place to offset the loss of the 1031 tax deferred exchange. This, of course will will reduce the revenue from property tax and defeat whatever temporary benefit these fools hope to achieve by their misguided attempt to eliminate a section of tax code that has served the nation and the state well since 1921. 89 years… What are they thinking?
It’s time for all responsible citizens to call these folks in Sacramento and remind them they need to defeat this proposed law in the interest of keeping California on the cutting edge and maintaining our standard of living. Please call your state representative and enlighten them to the error in their short sighted proposal.
Sorry I just had to have a rant on this stuff. It’s too important to ignore. Leave us a comment.
