The Swartz Report: 2018 Already Has a LOT Going On!

Don_Swartz 1Post written by Donald Swartz, President and Principal at Swartz + Associates, Inc. | Lover of Chiefs, Royals and golf | Avid “Cruiser” | Poker Enthusiast

Happy New Year everyone!

Based on happenings in the country and the marketplace, it appears the start of the year is coming on with a head of steam. The stock market continues to surge, tax reform is taking place, and backup quarterbacks have led teams to victory in the postseason (see Alabama, the Eagles and Vikings :))

As with the start of every year in our business, there’s always one thing we can count on: Property taxes will continue to be assessed on commercial, industrial and residential property, and business personal property in many states.

The commercial real estate market is fascinating right now.

One day we read about office buildings selling to institutional investors at capitalization rates at or below five percent. The following day, we read about 100 Sears and Kmart stores closing.  Multifamily projects continue to develop in Kansas City and many other cities while Walmart announces the closure of 63 Sam’s Club locations.

With the focus on fulfillment centers and Amazon’s ability to deliver cheaply and efficiently, warehouse space supply can’t keep up with demand, yet retailers Target and Costco continue to reach all-time highs in the stock market. At times, it’s dizzying!

Whoa! 500 pages of tax code.

Speaking of dizzying, maybe somebody can spend a few minutes summarizing the 500 pages of the recently passed tax code?  There was plenty of discussion concerning the repeal of Section 1031 of the Tax Code.

This section historically has allowed owners of real estate to defer income from the sale of real estate and effectively defer that gain into the acquisition of other real estate, in order to avoid taxes on the gain of the sale.

This section also applied to personal property such as equipment, airplanes and vehicles. While 1031 exchanges weren’t changed for real estate transactions, the section was eliminated for personal property.

2018So, let’s suppose an owner of a fully depreciated CNC Milling Machine is able to sell this used piece of equipment for $150,000.

Previously the owner could take the proceeds of the equipment and, if used to purchase new equipment, avoid paying income tax on the gain of $150,000, regardless if they purchased replacement property.

Since the 1031 no longer applies to personal property, the owner must now pay income tax on the value of the gain.

Could this possibly negatively impact the concept of buying new equipment and spurring the economy?

It’s an interesting question and one I discussed recently with a person who’s an expert in the area. Seth Leibson, Managing Director at CBIZ- MHM, LLC has been my long-time accountant and tax advisor.

The 500 pages in the revisions to the tax code without a single page of guidance by the IRS certainly does not make it likely I will be filing my taxes on a notecard – but maybe Seth can?  Seth is particularly adept in real estate partnerships and LLCs and I would urge you to contact him with any questions concerning these new changes.

2018 should be an interesting year in the property tax world.

There are states looking to argue sale-leaseback transactions are indicative of market value transactions. In my opinion, this would be a terrible directive because it values the “leased fee” income rather than “fee simple” income of a property. Fee simple income uses market data to determine income. The income is then capitalized to determine the market value of a property.

Leased fee income is based upon the lease in place for that particular property. When capitalized, it generates an opinion of value based upon its use, which in most states isn’t an indicator of fair market value (otherwise known as Value In Exchange). We will be monitoring these cases as they will have a significant impact in the property tax valuation world.

As always, thank you for sharing a few minutes of your day with me. Based on my Google Analytics results (Thank you again Blue Gurus!), it appears people are more interested in my comments than ever. I hope to keep things relevant while having fun!

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