As we slowly recover from the unrelenting bombardment of “what now?” In 2020 while our government responds by throwing money at all the issues, we often ask “how are we going to pay for all of this?” 


The state of California answered that question with a 16.8% marginal tax aimed at those with earnings of $5 million per year via Assembly bill 1253. If you’re thinking “If their earnings are that high, what’s another 3.5% of their income to help relieve it all?” 


Think about this, most small business owners would be the ones facing the extra burden.  With Nevada, Texas and Washington paying $0 in State Income Taxes, how long would these same small business owners remain in California? And if we export a substantial amount of our tax base— who’ll be left to pick up the tab? 


Proposition 15 is proposing to split the property tax roll which taxes commercial differently than residential parcels.  And the answer to who would pick up the tab? YOU.   Simply, if a rise in cost is applied to commercial real estate rent, those business owners wouldn’t have much other choice but to pass those higher expenses to customers. 


An opportunity for a significant tax grab could also be a way wherein capital gains taxes are deferred through 1031 exchanges.  


Congress can propose eliminating this loophole and generate billions in tax revenue by deferring long-term capital gains taxes through sale of income property.  It currently works like this- The seller enters a contract, creates a qualified intermediary prior to closing, closes, net sale proceeds go into an accommodator account and the seller identifies an upleg purchase inside 45 days from close, then buys the unplug at the earlier of 180 days from close or the filing date of next year’s tax returns.  Simple!


Thousands of these are done every year.  List of deferred are federal long-term capital gains of 15-20%, , 3.8% for the affordable care act, depreciation recapture of 25% and California state taxes on capital gains of 13.3%.  That’s an enormous amount!  If we tax those sales today over allowing deferrals, just think of the revenue it would generate. 


Good in theory, but here’s the catch— 


Income property owners often ask, “If I sell, what would I do with the proceeds?  I don’t want to pay half my gain in taxes.”  So if congress were to make changes in the rules or disallow 1031 exchanges altogether, sellers wouldn’t have much motivation to sell causing a fall-off in the income property market. 


On the other side of that coin are the multitude of industries that drink from the sale and purchase of commercial Real Estate fountain.  Businesses like Title companies, transactional lawyers, CPAs, escrow holders, lenders, property inspectors, environmental engineers and contractors, etc.  would largely suffer.,_Tax_on_Commercial_and_Industrial_Properties_for_Education_and_Local_Government_Funding_Initiative_(2020)