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Bad News When Investors Choose Not to Do Exchanges

Federal Revenues Will DECREASE:

• If one out of two investor/taxpayers chooses not to sell or have a taxable exchange, revenues will drop by FIVE percent.
• If two out of three investor/taxpayers chooses not to sell or have a taxable exchange, revenues will drop by SEVEN percent.
• If three out of four investor/taxpayers chooses not to sell or have a taxable exchange, revenues will drop by EIGHT percent.
• If four out of five investor/taxpayers chooses not to sell or have a taxable exchange, revenues will drop by NINE percent.

Capital Mobility Will Decrease Dramatically:

Although one cannot predict the actual amount, it can be said that capital mobility will decrease by approximately the same proportion as investor/taxpayers choose not to sell or exchange. Thus, if 50 percent of the investor/taxpayers decide not to go out of their properties there will be 50 percent drop in capital mobility among those persons.

Local Government Will Lose New Property Tax Revenues:

In those jurisdictions where re-assessment occurs only upon transfer there will be a loss of revenues to the extent of the number of transactions that do not occur times the average period for reassessment times the average reassessment Increase. If the average reassessment results in a 100 percent increase over a period of seven years, then every such exchange or sale that does not occur will cause there to be 50 percent less revenues collected in such a period on each such property. Although the exact number is not easy to calculate one can safely state that it is way Into the billions of dollars.

Real Estate Markets become Depressed

What will actually occur if a significant number of investor/taxpayers choose not to sell or buy? The real estate market also operates on supply and demand. When some investors drop out of the market prices are depressed on all properties in that market and this means that for those that do sell there will be lower relative prices and consequently less gain to tax on all transactions that do occur. If the market value of real estate is only one percent lower than it could otherwise be how many billions of dollars in revenues will be lost? Will there be a market price collapse when real estate investors are forced to sell at distress prices to raise the cash to pay the taxes that could have otherwise been delayed by exchanging ? How many investors will go belly up? What will the effect be of "locking" investors into properties where they cannot afford to get out because the tax liability exceeds the cash that can be generated?

Banks Will Suffer

They will be forced to hold loans longer and have less opportunity to earn loan fees on new loans. What has been the price in the past for stagnant loan portfolios? [Do you remember the bank near crisis in California when all loans were assumable and there was little loan turnover? (Garn - St. Germain) in part dealt with that issue]

Safe Retirements Will Be Shattered

How many millions of investor/taxpayers will lose their secure retirement when they are forced to pay taxes on investments they could have otherwise continued to let grow by exchanging? What will that cost government?

The Real Estate Industry Will Suffer

What will be the effect on revenues when the incomes of those who deal directly in exchange transactions (brokers, title companies, insurance companies, banks, appraisers, escrow companies, contractors and so forth) lose all or a portion of their business ?

The Construction Industry Will Suffer

How much will the construction industry be depressed if there is less purchase money available for new construction ? Who will be willing to invest in apartment housing and office housing when they cannot move their money upward with Section 1031 ? How many people will get out of the housing business ?