<p>A recent California Code of Regulations proposal considers requiring corporate taxpayers to use an historical apportionment formula to trace assets through numerous layers of like-kind exchanges to determine how to apportion gains from the eventual sale of a replacement asset that might be a decade (or more) removed from the original sale of a relinquished asset.&nbsp; <a href="https://www.accruit.com/sites/default/files/2016-LKE-letter-historical-…; target="_blank">The attached letter</a> from the leaders of the <a href="https://www.afsaonline.org/&quot; target="_blank">American Financial Services Association</a>, the <a href="http://www.elfaonline.org/&quot; target="_blank">Equipment Leasing and Finance Association</a>, and the <a href="http://www.acvlonline.com/&quot; target="_blank">Association of Commercial Vehicle Lessors</a> was written to the California Franchise Tax Board to provide insight into the burden that such a requirement would place upon the taxpayers.</p>

<p>As a qualified intermediary who monitors and facilitates thousands of sales and purchases of assets that qualify for like-kind exchange treatment nationwide, we echo the sentiments put forth in the attached letter and would encourage the Franchise Tax Board to build a process that encourages the reinvestment inherent in like-kind exchanges rather than penalizing businesses who engage in this process to expand their operations. Replacement assets are routinely disbursed throughout the U.S. with new tax bases derived from multiple sales from multiple states. Asking third parties to track and report on fractional taxing amounts through every asset's lifespan would be overburdensome.</p>

<p>In short, requiring the application of historical apportionment, which requires tracing of the gain or loss through multiple exchanges spanning decades of time, is simply not administratively feasible for corporate taxpayers with like-kind exchange programs.</p>

<p>Last week, I attended the Federation of Exchange Accommodators’ (FEA) annual conference, where it really struck home how impactful tax policy is for America.</p>

<p>The FEA is our nation’s only recognized association dedicated to education, proper conduct, and legislative representation for qualified intermediaries servicing IRC Section 1031 of the tax code, and as a sitting board member for over seven years, I am acutely aware of our membership’s activity levels.&nbsp; Activity levels that, in many ways, mirror our broader economy.&nbsp;</p>

<p>From 2009-2013, attendance was at an all-time low.&nbsp; Colleagues whose businesses prospered years earlier were experiencing a dramatic slowing in the number of 1031 transactions they facilitated. Taxpayers’ wealth in America was being depleted; asset values dropped to a fraction of past highs; and the need for deferring tax gains seemed less probable than a good, long rain in California.</p>

<h2>Fast Forward to 2015</h2>

<p>FEA attendance is not a leading economic indicator, but it very well could be.&nbsp; Attendance by qualified intermediaries in the last two years is up 20% year over year.&nbsp; Hotel blocks are being sold out, and qualified intermediary companies are growing.&nbsp; Why?&nbsp; Because since 1921 our country has provided a powerful tax strategy to encourage capital growth, expansion, and reinvestment back into the economy.&nbsp; This strategy – the use of 1031 like-kind exchanges - allows American businesses to rebuild what was ignored during the recession.&nbsp; With Section 1031’s wide economic impact, why Congress would even consider repealing such a stimulus baffles me.</p>

<p>The construction industries for homes, roads, buildings, and apartments are struggling to keep up with demand.&nbsp; New trucks, cars, planes, tractors, and cranes are all necessary to meet these demands, but the acquisition of these assets come with a significant cost.&nbsp; Companies are once again growing, reinvesting, and expanding, and 1031 like-kind exchanges provide an affordable pathway for the acquisition of these assets.&nbsp; 1031s literally help build America.</p>

<p>This is exciting and incredibly rewarding.&nbsp; Qualified intermediaries around the country serve the vital role of ensuring accuracy in fulfilling the 1031 requirements.&nbsp; Our customers rely on our knowledge to guide them as they make strategic decisions to grow their business, add employees, and redeploy their earned capital in the most effective manner.&nbsp; Having the immediate access to <strong>ALL</strong> of their earned capital after a divestment stimulates so many sectors of our economy. Section 1031 is the oil in our economic engine.&nbsp;</p>

<h2>Wide-Ranging Impact of 1031 Like-Kind Exchanges</h2>

<p>One of our clients recently sold an income-producing piece of real estate and has dreams of building a bigger facility.&nbsp; Using a 1031 exchange, they’ve decide to reinvest into a vacant piece of land.&nbsp; In the months after closing on the new land, architects were hired, roads were graded, permits were submitted, and surveying was completed.&nbsp; Extra capital was sought out while dozers prepared the land. Engineers are now engaged, and construction has started - bricks being laid, plumbing being routed, carpet being installed and paint being applied.&nbsp; Movers will soon deliver new equipment, desks, and supplies.&nbsp; Employees will be hired and, with the help of Section 1031, our client is realizing their vision.</p>

<p>Nobody should sit on the sidelines and allow 1031s be repealed.&nbsp; Recent economic studies by both <a href="/blog/1031-like-kind-exchange-impact-study-results-released">Ernst &amp; Young</a> and <a href="/blog/new-study-confirms-like-kind-exchanges-encourage-job-creation-and-stimulate-economic-growth">Ling &amp; Petrova</a> underscore the dramatic impacts to our economy should 1031s no longer be an option to businesses.&nbsp; As the next 15 months unfold, and we elect a new president and see changes in the Senate and the House, remember what drives our economy and your business.&nbsp; Tax policy that we can rely on, plan for, and grow in is what our economy needs to stay strong.</p>

<p>Earlier in the year I discussed Congress’ intent to move toward tax reform.&nbsp; Chairman Hatch of the Senate Finance Committee had announced bipartisan tax reform working groups in January with recommendations due in late May, a deadline that was postponed twice.&nbsp; The writing was on the wall for “business only” tax reform with the intention of providing tax relief for corporations.&nbsp; These proposals were met with dissension by the majority of U.S. businesses operating as pass-through entities.&nbsp; Simultaneously, international tax reform was gaining momentum in parallel with the emptying of the highway trust fund coffers and the newly proposed international trade acts reforms.&nbsp;</p>

<h2>We're Not Out of the Woods</h2>

<p><a href="http://www.bkd.com/articles/2014/analysis-of-chairman-camps-draft-tax-r…; target="_blank">The Tax Reform Act of 2014</a>, which includes a complete repeal of 1031 like-kind exchanges, continues to loom as a starting point for comprehensive reform.&nbsp; And the <a href="http://www.treasury.gov/resource-center/tax-policy/Documents/General-Ex…; target="_blank">President’s Green Book budget proposal</a> also severely limits the use of 1031s.</p>

<p>What’s the old saying?&nbsp; “History does not repeat itself, but it rhymes.”<br />
<br />
As we watch this Congress work hard to keep promises by passing reforms, the always lingering question is still, “Who is going to pay for tax reform?” During last month's discussions on transportation legislation, Senator Pat Roberts (R-Kan.) pointed out the increasing difficulty to find enough spending cuts to cover the costs of the long list of programs that need funding.</p>

<p>“We’re looking in every corner for every pay-for. It is just terribly difficult to find this kind of money, and we’re probably painted into the corner on a lot of different issues.”</p>

<h2>1031s Should Not Be the Pay-For</h2>

<p>Through multiple coalition efforts, the 1031 industry continues to pressure Congress to leave 1031 like-kind exchanges in their current state. Through letters, independent studies, face-to-face meetings, testimonials and fund raisers, the supporters of <a href="/blog/new-study-confirms-like-kind-exchanges-encourage-job-creation-and-stimulate-economic-growth">growing our economy</a>, expanding employment, and capital formation continue to push for certainty around 1031 like-kind exchanges. It's been an extensive and costly effort. Still, it's August and once again, the frustration of the inaction in our nation’s capital remains a constant.</p>

<p>If bonus deprecation is extended or section 179 expanded, your company will likely determine the impact of this retroactive incentive bill. At the same time, what will this mean for 2016? What changes need to be made today in your business IF Congress does NOT act?&nbsp; What if they do act?&nbsp; What is the cost to your business if the changes impact your current tax position significantly? It is very hard, if not impossible, to build and thrive in today’s business climate by awaiting actions beyond your control.&nbsp; Across the country, we are seeing tremendous growth in every business sector. The economy is expanding and businesses want to reinvest in growth, however the continued uncertainty is a huge obstacle to long-range planning.&nbsp; IF the Highway Trust Fund bill eventually moves through Congress, IF the President signs off, IF the bill funds more than 15 months of emergency fixes to our infrastructure, IF IF IF!&nbsp;</p>

<h2>Contact Your Representatives</h2>

<p>It’s crucial to remember that we are not out of the woods. Tax reform discussions will be back in 2016, so we need to educate Congressional leaders now as to why 1031s are important to your business and to the economy. Reach out and schedule in-district meetings with your representatives; meet them on your turf; let them hear you loud and clear that 1031 like-kind exchanges are a powerful tool you use in your business.&nbsp; As a constituent, share with your elected officials your stories of growth and new employee-hiring numbers.&nbsp; Describe your five year plan IF and ONLY IF they can provide certainty for you to plan your business.</p>

<p>The national associations to which you belong often provide tools and information to contact or identify your representatives. If they don't, <a href="mailto:brenta@accruit.com?subject=Tax Reform blog">contact me</a>. I'll gladly give you the contact information you need as well as discuss talking points and strategy, and I would be happy to provide you with white papers and studies to support your discussion. The time to get involved and have Congress hear your voice is NOW!</p>

<p>Accruit's Chief Operating Officer, <a href="http://www.bizjournals.com/denver/print-edition/2015/08/21/karen-kemerl…; target="_blank">Karen Kemerling</a>, is one of three finalists for <em>Denver Business Journal</em>'s 2015 Outstanding Women in Business award in the Banking, Finance and Accounting category.</p>

<p>Each year, the <a href="http://www.bizjournals.com/denver/news/2015/07/17/who-are-the-2015-outs…; target="_blank"><em>Denver Business Journal</em></a> recognizes Denver's most influential women with awards in the categories of Architecture, Engineering and Construction; Banking, Finance and Accounting; Communications, Media and Public Relations; Education, Government and Nonprofits; Health Care; Large Business Owner; Law; Mile High Leaders; Real Estate; Small Business Owner; Technology and Telecommunications; Lifetime Achievement and the newly added Energy Industry.</p>

<p>The other finalists in the Banking, Finance and Accounting category are Kathryn Albright of U.S. Bank and Barbara Brohl of the Colorado Department of Revenue. View a <a href="http://www.bizjournals.com/denver/news/2015/07/17/who-are-the-2015-outs…; target="_blank">slideshow of the 2015 finalists in all categories</a> and join the <a href="http://www.bizjournals.com/denver/event/118391#eventDetails&quot; target="_blank">Outstanding Women in Business Awards Luncheon</a> on Thursday, August 20, 2015.</p>

<p><a href="http://www.bizjournals.com/denver/print-edition/2015/08/21/karen-kemerl…; target="_blank">Read "Karen Kemerling scores in the accounting game" in the <em>Denver Business Journal</em></a>.</p>

<p>A new, in-depth study of the U.S. commercial real estate market found that 1031 like-kind exchanges strengthen the market and stimulate job creation, investment, and economic growth.</p>

<p>“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” analyzed more than 1.6 million real estate transactions over an 18-year period. It was commissioned by the Real Estate Like-Kind Exchange Coalition, comprised of organizations across all sectors of the industry, in response to legislative proposals to repeal <a href="/exchange-library/internal-revenue-code-section-1031" target="_blank">Section 1031</a>.</p>

<p><a href="http://www.1031taxreform.com/ling-petrova/&quot; target="_blank">Read an overview of the Ling-Petrova Study at the FEA's website</a>.</p>

<h2>Study Findings:</h2>

<ul>
<li><strong>Like-kind exchanges encourage investment.</strong>&nbsp; On average, taxpayers using a like-kind exchange acquire replacement property that is $305K-$422K more valuable than the relinquished property, while replacement properties without using an exchange are cheaper or of equal value.</li>
<li><strong>Like-kind exchanges contribute significant federal tax revenue</strong>.&nbsp; In 34 percent of exchanges, some federal tax is paid in the year of the exchange. More importantly, over the long run, like-kind exchanges boost tax revenue because of the higher tax liability that arises in the years following the initial exchange.</li>
<li><strong>Like-kind exchanges lead to job creation</strong>.&nbsp; Real estate acquired through a like-kind exchange is associated with greater investment and capital expenditures (i.e., job-creating property upgrades and improvements) than real estate acquired without the use of like-kind exchange.</li>
<li><strong>Like-kind exchanges result in less debt</strong>.&nbsp; When the price of the replacement property is close to, or less, than the price of the relinquished property, like-kind exchanges result in a 10 percent reduction in borrowing, or leverage, at the time of the acquisition.</li>
</ul>

<p>Additionally, in response to legislative proposals to eliminate like-kind exchanges, the study found that such action would have the following deleterious effects:</p>

<ul>
<li><strong>Taxes would increase for thousands of commercial property owners</strong>.&nbsp; For a typical property owner who defers his or her gain on a commercial property, repealing like-kind exchanges would raise the effective tax rate on the taxpayer’s investment (including rental income and gain; nine-year holding period) from 23 percent to 30 percent.</li>
<li><strong>Property values would drop.</strong>&nbsp; In order for a commercial property to generate the same rate of return for the investor (if section 1031 were repealed), prices would have to decline. In local markets and states with moderate levels of taxation, commercial property price would have to decline 8 to 12 percent to maintain required equity returns for investors expecting to use like-kind exchanges when disposing of properties. These price declines would reduce the wealth of a large cross-section of households and slow or stop construction in many local markets.</li>
<li><strong>Rents would increase.</strong>&nbsp; Over time, real rents would need to increase from 8 to 13 percent before new construction would be economically viable.&nbsp; These higher rents would reduce the affordability of commercial space for both large and small tenants. The price declines and rent effects of eliminating real estate like-kind exchanges would be more pronounced in high-tax states.</li>
<li><strong>Real estate sales activity would decline.</strong>&nbsp; Like-kind exchanges increase the liquidity of the real estate market.&nbsp; An analysis of 336,572 properties that were acquired and sold between 1997 and 2014 showed that properties involved in like-kind exchanges had significantly shorter holding periods.</li>
</ul>

<p>The study’s authors, Dr. David Ling (finance professor at the University of Florida’s Warrington College of Business and past president of the American Real Estate and Urban Economics Association) and Dr. Milena Petrova (finance professor at Syracuse University’s Whitman School of Management), analyzed more than 1.6 million real estate transactions over an 18-year period (1997 – 2014).&nbsp; Combined, the total volume of the transactions (unadjusted for inflation) is $4.8 trillion.</p>

<p>“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” was developed using the most comprehensive database of US commercial real estate activity in existence.</p>

<p>In an effort increase awareness of current policy issues and to convey the voice of the equipment leasing and financing industry, members of the Equipment Leasing and Finance Association (ELFA) are on Capitol Hill May 13-May 14 for meetings with elected officials and legislative staff.</p>

<p>Accruit's Brent Abrahm joined top executives in the leasing industry to meet with members of Congress and the Joint Committee on Taxation on matters pertinent to like-kind exchanges.</p>

<p>_{Photo: (left to right) Dan McKew of Capital One Leasing, Representative Lynn Jenkins (R-KS), Accruit's Brent Abrahm}</p>