Monthly Archive: April 2014

TAX REFORM ACT OF 2014

TAX REFORM ACT OF 2014

Submitted by Chris Moss CPA

You may have heard, Dave Camp(R-MI) Chairman House Ways and Means has come up with the Tax Reform Act of 2014, a massive rewrite of the US Tax Code of 1986. I just finished reading the 194 page Discussion Draft and this is truly a massive revision if not entirely new tax code worthy of comparison to the Reagan reforms over 25 years ago. There are a lot of repeals and a lot of surprises. There is a lot of changes that are good and some that perhaps are not so good. While I don’t think this Tax Reform Act of 2014 is going to become law in its current form anytime soon, just in case, I better tell you just a little about what lies ahead for us all.

The big Surprise for me? Like kind tax free exchanges under Section 1031 would be repealed under Title III Sec. 3133 of the Act. (Page 80). Congressman Camp gives two reasons for this:

1.The like-kind exchange rules currently allow taxpayers to defer tax on the built-in gains in property by exchanging it for similar property. With multiple exchanges, gains essentially may be deferred for decades, and ultimately escape taxation entirely if the property’s basis is stepped up to its fair market value upon the death of the owner.

2.The current rules have no precise definition of “like-kind,” which often leads to controversy with the IRS and provides significant opportunities for abuse

I guess in the back of my mind, I always thought that a non-simultaneous tax deferred exchange or Starker exchange was too good to be true. See: Starker v. United States, 602 F.2d 1341 Perhaps it was too good to be true. But the US Tax Court is as much to blame for its mind boggling logic as the IRS in promulgating an insanely complex set of treasury regulations that defy any rational explanation. What will happen with the repeal of tax free exchanges?

It’s my guess that there is a vast huge amount of real estate that is owned by hedge funds and the super-rich with a very low if not zero basis right now that has been consistently Starker exchanged for income producing property such as rentals both residential and commercial over the last thirty years. If my guess is right a new industry of qualified intermediaries and real estate professionals creatively and regularly come up with new tax free deals to sell to their customers, creating a very large market and turnover for high end commercially leased property as well as residential condominiums, hotels and substantial other real estate in the United States. Perhaps this market is pumping Trillions of dollars in our economy. Seems like this whole industry is worth keeping. Perhaps we don’t allow a step up basis on death instead of repealing Section 1031? Isn’t that a lot better than creating a massive decline in real estate values as thousands of Starker investors try to unwind their deals.

Smaller proposed provisions to be eliminated and repealed that surprised me:
First, new Section 1402 (page 30) Mortgage Interest now would be limited to $500,000 of debt. Congress claims they are simply encouraging Americans to contribute more equity to their homes and less debt. This sounds good on the surface, But deeper down into the core of this proposed so called “tax reform” are large savings and investment accounts belonging to very wealthy taxpayers just waiting to take advantage of this new provision in the IRS Code of 2014. I will bet you all that money like this was mostly inherited. But for most middle class American working W2 wage earners, any money they try to save and any kind of cash they try build up outside of a 401K is taxed very heavily. So I can just imagine thousands of taxpayers who have spent most of our lives leveraging out real estate purchases with 20% down or even less back in the day will be totally disenfranchised with $500k debt limit. Let’s take an example to bring this home to all of us: Better situation wealthier folks who have the cash-perhaps inherited years earlier- put 50% down or $500 on a home for $1million. I don’t know about you all but I don’t have $500k sitting in a savings account waiting around for a down payment on a home. For Congress to encourage Americans to put 50% down or more without a corresponding incentive to save sends the wrong message to American workers and seems like a no go from the get go.

Finally, second and third: Medical expense would not be deductible at all under the new Section 1409 (page 36) and neither would be alimony be deductible under the proposed Section 1411. (page 37). Why? The proposal draft doesn’t say. (Hey I’m not making this up take a look for yourself.) Perhaps you have had enough? But just so you know, I have a work around for all this. Stay married, healthy, live in a small home, make less money, and don’t exchange anything for a while. End of story.

Until next month, kindest regards from Chris Moss CPA