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Real Estate Tax Exemptions Facing an Uncertain Future

by | Sep 30, 2020

Property Investors and Owners Need to Act Quickly to Ensure Current Tax Benefits

By Eric P. Haims, MAI, AI-GRS   

Property investors and owners shouldn’t procrastinate in taking advantage of the current real estate tax benefits, in order to avoid potential changes in the tax code that could soon eliminate the current benefits.

This is based on uncertainty surrounding the November 2020 general election.

Potential Demise of 1031 Exchanges

The possibility that certain real estate tax exemptions may disappear has gained traction with candidates announcements that the decades-long rule regulating 1031 “like-kind” exchanges may be changed or eliminated.  Current estate planning and gift tax strategies also may be at risk.

The 1031 Exchange is an Internal Revenue Service rule that allows property owners or investors to avoid or minimize capital gains taxes after they sell real estate, if they subsequently reinvest the money into a similar property. Some of the benefits of this exemption – which is estimated to save property investors more than $50 billion over the next four years—includes the ability of real estate developers to write off losses on borrowed money and claim depreciation on their buildings.

Investors should avoid adopting a wait-and-see attitude on whether 1031 exchanges will survive the latest effort to scuttle them. While the capital gain and 1031 exchanges still exist, it would be prudent for property owners to sell assets between now and the end of the year and reinvest the money tax-free rather than taking a high-risk gamble on the fate of this exemption.

Estate Planning Strategies Also At Risk

It would also be in the best interests of older Americans to immediately start reassessing their estate planning strategies due to lower asset values, a favorable interest-rate environment and current market volatility. The 2020 estate and gift tax exemption is $11,580,000 per person, the highest amount ever.

That’s because current estate tax exemptions also may change following the upcoming November election.

Rather than wait and see what happens, it’s highly recommended for property owners to get a current gift tax appraisal of their property in order to take advantage of today’s lower property values. This would include appraisals for those owners who plan to gift only a portion or portions of their property to one or more younger family members.

For example, our New York office serves clients who own partial interests in a property or multiple properties through limited liability corporations.  As a result of the pandemic, valuations are lower for most asset classes, such as the hospitality, office, entertainment and retail sectors. The current economic landscape makes it an optimal time for our private clients to gift property to their children, as estate planning revolves around gifting partial ownership to the next generation.

Options for Estate Tax Appraisals

Estate taxes are a “triggered” event, which means that appraisals are required to determine the amount of taxes to be paid when a property is inherited or to determine the basis of the property for the person inheriting the property from the person who just passed away. Either the date of death or a six-month alternate date is used as the date of value, which in turn determines the amount of taxes owed.  But due to the lower valuations caused by the pandemic, executors of estates of those who passed away during this period will want to choose the six-month alternate option if the death occurred before or at the beginning of the pandemic. Also, the lower estate and gift tax exemptions could be effective as early as January 1, 2021, so prompt attention by property owners would be prudent. BBG can assist executors or estate tax attorneys to look at both valuation dates to help them choose which date to select as the date of value as well as provide estate related appraisal services.

Given how the pandemic has impacted the economy and the current political uncertainty, property owners and investors should heed the old adage of “there’s no time like the present” when it comes to using real estate exemptions before they cease to exist.

Eric P. Haims, MAI, AI-GRS, is the Managing Director of the New York office of BBG, a leading national due diligence commercial real estate firm.