<p>The<a href="http://1031.org/&quot; target="_blank"> Federation of Exchange Accommodators (FEA)</a> is among 26 groups that signed letters sent to the Hillary Clinton and Donald Trump presidential campaigns last week. The letters explain the benefit of real estate exchanges for small businesses, farmers, ranchers, and for use in land conservation. The timing of these letters are important, as both campaigns are developing and revising tax plans.&nbsp;</p>

<p>A revised Clinton tax reform proposal released September 22, 2016 mentions limitation of gain deferral under Section 1031 exchanges, expected to be similar to the Administration's FY2017 Budget proposal.</p>

<p>Our goal is to dispel common myths and to inform the candidates and their policy advisors as the tax reform proposals from both candidates continue to evolve and change.</p>

<p>The letters make some important points about like-kind exchanges:</p>

<ul>
<li>Exchanges are used by taxpayers of all sizes;</li>
<li>Exchanges encourage domestic investment and job growth;</li>
<li>Exchanges encourage improvements on real estate;</li>
<li>Exchanges encourage transaction activity on properties that would not otherwise be sold;</li>
<li>Exchanges help small businesses build equity and avoid third-party financing;</li>
<li>Exchanges help maintain affordable housing across the country;</li>
<li>Exchanges help facilitate the preservation of open spaces and environmentally sensitive areas.</li>
</ul>

<p><a href="http://www.1031taxreform.com/wp-content/uploads/Hillary-Clinton-Campaig…; target="_blank">Read the letter to Secretary Clinton here</a>.<br />
<a href="http://www.1031taxreform.com/wp-content/uploads/DJTrump-ltr-re-LKE-FINA…; target="_blank">Read the letter to Donald Trump here</a>.</p>

<p>&nbsp;</p>

<p>While congressmen and women are out campaigning, congressional staff continue to work in the area of tax reform.&nbsp; As part of Accruit’s continued advocacy efforts on behalf of our real estate and personal property LKE clients and as co-chair of the <a href="http://1031.org/&quot; target="_blank">Federation of Exchange Accommodators</a> Government Affairs Committee, I’ve made six trips to Capitol Hill this year to meet with congressional staff, specifically targeting members of the House Ways &amp; Means Committee and <a href="http://www.finance.senate.gov/&quot; target="_blank">Senate Finance Committee</a>, both of which determine U.S. tax policy.</p>

<h2>House Ways &amp; Means Draft Blueprint for Tax Reform</h2>

<p>Earlier this year, House Ways &amp; Means Chairman Kevin Brady, (R-TX) introduced the draft blueprint for comments and, learning from the experiences of past Chairman Dave Camp, is soliciting input on the blueprint from members of Congress, the business community, and other interested groups prior to voting out of committee.&nbsp; &nbsp;I’d like to highlight several points in the draft House Blueprint that could impact your business:</p>

<p><strong>100% Immediate Expensing</strong></p>

<p>Accelerating write-offs of capital assets is not a new expansion method and is still very popular.&nbsp; The idea dates back to the 1980s, and more recently we have seen bonus depreciation as a widely accepted form of this.&nbsp; But there are areas that the blueprint does not yet specify.&nbsp;</p>

<p><strong>Eligibility for new and used assets:</strong> Though the House Ways &amp; Means Committee is currently silent, comments from senior staff indicate a preference to include all assets, new and used, <u>except land</u>..&nbsp; Excluding land may cause complications when allocating cost between land and buildings. Also, excluding land could prove problematic when it comes to maintaining a reasonable debt-to-equity ratio when funding projects up front. There are also indications of further exclusions for certain classes of assets, but details are still unavailable.</p>

<p><strong>No interest deductibility</strong>:&nbsp; 100% immediate expensing is costly, so the funds for the blueprint would come partially come from eliminating interest deductions on debt.&nbsp; For our clients whose business model requires a higher debt-to-equity ratio, such a measure would make supporting growth initiatives or even maintaining current operations difficult.&nbsp;</p>

<p><strong>Potential elimination of 1031 like-kind exchanges:&nbsp; </strong>Ways &amp; Means senior staff indicated that while the elimination of like-kind exchanges is not currently drafted, it is still up for consideration as offset to cover the plan. During our meetings, we made very strong points as to why 1031 like-kind exchanges need to remain intact, should this bill move forward.</p>

<ol>
<li>Not all companies would choose 100% expensing.&nbsp; Depending on a company’s tax situations, immediate write-offs for tax purposes may not provide the flexibility needed to achieve company goals.&nbsp;&nbsp;</li>
<li>Not all states may recognize 100% expensing for state tax purposes.&nbsp; Like-kind exchanges must be the vehicle to defer gain recognition at the state level.</li>
<li>Not all assets may fall into 100% expensing categories.&nbsp; Absent 1031s, <a href="/blog/1031-like-kind-exchange-impact-study-results-released">per the independent studies regarding repeal of 1031s</a>, a contraction may occur in GDP due to the lock-in effect if assets’ sales trigger gains and there is no means of deferral.</li>
<li>If land is not eligible for immediate expensing, then 1031s must remain the vehicle to defer gain recognition and encourage subsequent investment.</li>
</ol>

<h2>Senator Wyden’s Pooling Proposal</h2>

<p>The <a href="/blog/tax-reform-discussion-draft-released-simplify-depreciation">pooling proposal from minority leader of the Senate Finance Committee, Senator Ron Wyden (D-OR)</a>, is another draft proposal worthy of continual monitoring. Election pundits suggest we may see a flip in the Senate from Republican to Democrat, placing Senator Wyden as chairman of the committee.&nbsp;</p>

<p>There are some new ideas for U.S. tax code in Wyden’s draft, the basis of which has its roots in Canadian tax policy.&nbsp; Wyden’s plan attempts to simplify depreciation calculations by pooling like assets in large groups (though FEA coalition members indicate the need to continue track assets on an individual basis negating most, if not all, of the simplification message). &nbsp;&nbsp;</p>

<p>Unlike past Senate proposals, Wyden does not eliminate 1031s.&nbsp; In fact, he continues to be a big supporter of the ability to defer gain recognition to encourage reinvestment.&nbsp; As we continue our dialog with committee members, applauding the retention of 1031s, we want to better understand how a new pooling regime provides the much-touted simplification while protecting the integrity and spirit of 1031 exchanges.&nbsp;&nbsp;&nbsp; &nbsp;</p>

<h2>Avoid Unintended Consequences</h2>

<p>Accruit continues to invest in advocacy efforts, hoping to connect the dots when tax reform bills are introduced so that you, our clients, will be informed on the details and not rely solely on the headlines.&nbsp; While in DC we constantly state our goal of <em>avoiding unintended consequences</em>.&nbsp; Members of Congress who introduce ideas that not only disrupt your business, but ours as well, need to understand the real implication of bills that may score well into a ten-year window. Though in the short term they appear to drive growth, they may, in the long term, impede business and dampen the economy.</p>

<h2>Congressional Member Offices Visited in August</h2>

<ul>
<li>Barbara Angus – House Ways and Means Committee</li>
<li>Aruna Kalyanam and Alan Lee, House Ways and Means Committee (Minority)</li>
<li>Rep. Kenny Marchant (R-TX-24)</li>
<li>Rep. George Holding (R-NC-13)</li>
<li>Rep. Jason Smith (R-MO-8)</li>
<li>Rep. Peter Roskam (R-IL-6)</li>
<li>Senator Chuck Schumer (D-NY)</li>
<li>Rep. Pat Tiberi (R-OH-12)</li>
<li>Rep. Jim Renacci (R-OH-16)</li>
<li>Rep. Pat Meehan (R-PA-7)</li>
<li>Senator Bob Menendez (D-NJ)</li>
<li>Rep. Tom Reed (R-NY-23)</li>
<li>Rep. Adrian Smith (R-NE-3)</li>
</ul>

<p>In June, two members of the House Agriculture Committee, Representative Bob Gibbs (R-OH) and Representative David Rouzer (R-NC), and 17 other congressmen and congresswomen wrote a letter to House Ways and Means Committee Chairman Kevin Brady (R-TX) urging the committee to help preserve 1031 like-kind exchanges. The letter, attached below, called Section 1031 "integral to [its] operations and ongoing vitality."</p>

<blockquote>
<p>"The provision serves as an important tool for providing flexibility and increased economic efficiencies for the agricultural community. Section 1031 permits a taxpayer to exchange business-use or investment assets for other like-kind business-use or investment assets, without recognizing taxable gain on the sale of the old assets. These taxes, that would otherwise be due if the transaction was structured as a sale, are deferred. The repeal of this fundamental provision would have a monumental negative impact on the industry as a whole."</p>
</blockquote>

<p>In the photo above, Federation of Exchange Accommodators Government Affairs co-chair and Accruit CEO Brent Abrahm discusses the letter with Representative Brady at a legislative event with the Associated Equipment Distributors trade association. Read more about these recent efforts on behalf of Section 1031 in yesterday's article on the Americans for Tax Reform website, <a href="http://www.atr.org/kind-exchanges-are-model-all-capital-gains&quot; target="_blank">"Like-Kind Exchanges are a Model for All Capital Gains."</a></p>

<p>Accruit, LLC, the nation’s leading provider of qualified intermediary and 1031 like-kind exchange program solutions, today announced a definitive agreement to acquire all of the assets of Bankers Escrow Corporation, one of the largest full service escrow companies in Colorado.&nbsp; The parties anticipate a closing on June 30, 2016. Going forward, services will be provided under Accruit-owned Bankers Escrow, LLC.<br />
<br />
Since 1991, Bankers Escrow Corporation has been an escrow agent for tax and insurance reserves, installment land contract and wrap-around mortgage servicing, lease to purchase arrangements, software code escrows, and document and cash holding escrows. Additional escrow services offered are construction draw escrows, business and assumption closing services, and private placements.&nbsp;&nbsp; All the current escrow officers will be transferring to the newly-formed Bankers Escrow, LLC, where they will continue to provide all the current escrow services, ensuring consistency of service and processing.&nbsp;</p>

<p>Like Accruit, Bankers Escrow Corporation provides qualified intermediary and exchange accommodation titleholder services for 1031 like-kind exchange clients, therefore the acquisition furthers Accruit’s presence in the 1031 real estate market.&nbsp; “We’re delighted to expand Accruit’s offerings to include escrow services and to continue to grow the business that Mary Lou has built both in the escrow and real estate 1031 arenas.&nbsp; Banker’s Escrow is a strong brand whose customer-oriented focus aligns well with Accruit’s own,” said Accruit CEO, Brent Abrahm.&nbsp;&nbsp;</p>

<p>As of July 1, Bankers Escrow Corporation vice president, Mary Lou Schwab, will join Accruit in a consulting role, bringing 30 years of real estate tax accounting, tax deferred exchange, and escrow experience. Ms. Schwab is also a Certified Exchange Specialist^® through the Federation of Exchange Accommodators, a licensed CPA, and an educator in real estate taxation and 1031 exchange continuing education classes for Colorado realtors.&nbsp; Ms. Schwab stated, “With this acquisition, Bankers Escrow will continue to serve new and longstanding customers with integrity and professionalism. The additional technology and resources Accruit provides will propel Bankers Escrow to a new level of service and security.”</p>

<p>In April, Senator Ron Wyden (D-OR) released a cost recovery reform and simplification discussion draft that would repeal our current depreciation method for assets used in business.&nbsp; Currently, deprecation is calculated under MACRS (Modified Accelerated Cost Recovery System).&nbsp; This proposal would repeal MACRS and replace the schedules with six individual pooling methods into which similar tax life assets are grouped together (pooled) and depreciated as a group of assets.&nbsp; Accruit, along with several of our association partners, were given an overview of the plan and asked for feedback prior to the release.</p>

<p>At a high level, pooling doesn’t sound like a bad idea; there are six buckets and an inclusive structure for like-kind exchanges without the requirements that burden today’s taxpayer. But closer analysis of the draft bill yields some concerns. Tracking detailed information at an asset-level is standard operating procedure and not considered an extra burden by the majority of Accruit’s clients who made&nbsp; investments years ago into systems that provide the asset-level tracking required in many types of businesses (leasing, for instance) and by most states.</p>

<p>The following, provided by PwC, presents a detailed overview of the discussion draft. I will keep you apprised of ongoing discussion with our 1031 Coalition partners, Senate Finance Committee members, and others as I coordinate further commenting on the draft proposal.</p>

<p>Senate Finance Committee examines business tax reform issues; Ranking Member Wyden releases draft cost recovery tax reform bill</p>

<p>^{<a href="https://www.flickr.com/photos/pirateyjoe/6741095543&quot; target="_blank">Photo of Senator Wyden by Sam Craig</a>}</p>

<p><em>Accruit was pleased to contribute to the following letter submitted to the Senate Finance Committee yesterday on behalf of the 1031 Like-Kind Exchange Coalition. We are seeing great strides in our efforts with Congress as we continue to educate members on the benefits that 1031 like-kind exchanges bring to the economy.</em></p>

<p><span style="color:#000000;">May 10, 2016</span></p>

<p><span style="color:#000000;">The Honorable Orrin G. Hatch<br />
Chairman<br />
Senate Committee on Finance<br />
219 Dirksen Senate Office Building<br />
Washington, D.C. 20510</span></p>

<p><span style="color:#000000;">The Honorable Ronald L. Wyden<br />
Ranking Member<br />
Senate Committee on Finance<br />
219 Dirksen Senate Office Building<br />
Washington, D.C. 20510</span></p>

<p><span style="color:#000000;">Dear Chairman Hatch and Ranking Member Wyden:</span></p>

<p><span style="color:#000000;">As the Senate Finance Committee considers ways to create jobs, grow the economy, and raise wages, we strongly urge you to retain current law regarding like-kind exchanges under section 1031 of the Internal Revenue Code (“Code”). Like-kind exchanges are integral to the efficient operation and ongoing vitality of thousands of American businesses, which in turn strengthen the U.S. economy and create jobs. Like-kind exchanges allow taxpayers to exchange their property for more productive like-kind property, to diversify or consolidate holdings, and to transition to meet changing business needs. Specifically, section 1031 provides that firms and investors do not immediately recognize a gain or loss when they exchange assets for “like-kind” property that will be used in their trade or business. They do immediately recognize gain, however, to the extent that cash or other “boot” is received. Importantly, like-kind exchanges are similar to other non-recognition and tax deferral provisions in the Code because they result in no change to the economic position of the taxpayer.</span></p>

<p><span style="color:#000000;">Since 1921, like-kind exchanges have encouraged capital investment in the United States by allowing funds to be reinvested in the enterprise, which is the very reason section 1031 was enacted in the first place. These investments not only benefit the companies making the like-kind exchanges, but also suppliers, manufacturers, and others facilitating them. Like-kind exchanges ensure both the best use of real estate and a new and used personal property market that significantly benefits start-ups and small businesses. Eliminating them or restricting their use would have a contraction effect on our economy by increasing the cost of capital. In fact, a recent macroeconomic analysis by Ernst &amp; Young found that limitations on like-kind exchanges could lead to a decline in U.S. GDP of up to $13.1 billion annually.¹</span></p>

<p><span style="color:#000000;">Companies in a wide range of industries, business structures, and sizes rely on the like- kind exchange provision of the Code. These businesses—which include construction, industrial, and farm equipment; vehicle manufacturers and lessors; and real estate—provide essential products and services to U.S. consumers and are an integral part of our economy. A study by researchers at the University of Florida and Syracuse University supports that without like-kind exchanges, businesses and entrepreneurs would have less incentive and ability to make real estate and capital investments. The immediate recognition of a gain upon the disposition of property being replaced would impair cash flow and could make it uneconomical to replace that asset.² As a result, requiring the recognition of gain on like-kind exchanges would hamper the ability of businesses to be competitive in our global marketplace. The reduced investment in real estate and capital would also have significant upstream and downstream impacts on economic reactivity and employment in industries as diverse as real estate, agriculture, construction, tourism, hospitality, trucking, and equipment supply.</span></p>

<p><span style="color:#000000;">In summary, there is strong economic rationale, supported by recent analytical research, for the like-kind exchange provision’s nearly 100-year existence in the Code. Limitation or repeal of section 1031 would deter and, in many cases, prohibit continued and new real estate and capital investment. These adverse effects on the U.S. economy would likely not be offset by lower tax rates. Finally, like-kind exchanges promote uniformly agreed upon tax reform goals such as economic growth, job creation and increased competitiveness.</span></p>

<p><span style="color:#000000;">Thank you for your consideration of this important matter.</span></p>

<p><span style="color:#000000;">Sincerely,</span></p>

<p><span style="color:#000000;">American Car Rental Association<br />
American Farm Bureau Federation<br />
American Truck Dealers<br />
American Trucking Associations<br />
Asian American Hotel Owners Association<br />
Associated General Contractors of America<br />
Avis Budget Group, Inc.<br />
CCIM Institute<br />
C.R. England, Inc.<br />
Equipment Leasing and Finance Association<br />
Federation of Exchange Accommodators<br />
Hertz Global Holdings, Inc.<br />
Idaho Dairymen’s Association<br />
Institute of Real Estate Management<br />
National Apartment Association<br />
National Association of Real Estate Investment Trusts<br />
National Association of Realtors ®<br />
National Automobile Dealers Association<br />
National Multifamily Housing Council<br />
National Stone, Sand, and Gravel Association<br />
National Utility Contractors Association<br />
The Real Estate Roundtable<br />
Realtors ® Land Institute<br />
South East Dairy Farmers Association<br />
Truck Renting and Leasing Association<br />
Western United Dairymen</span></p>

<p>¹ <a href="http://www.1031taxreform.com/wp-content/uploads/EY-Report-for-LKE-Coali…; target="_blank">Economic Impact of Repealing Like-Kind Exchange Rules</a>, ERNST &amp; YOUNG (March 2015, revised November 2015)</p>

<p>² David Ling and Milena Petrova, <a href="http://www.1031taxreform.com/wp-content/uploads/Ling-Petrova-Economic-I…; target="_blank">The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate</a> (March 215, revised June 2015)</p>

<p>&nbsp;</p>