I don’t know if anyone else saw the irony in it, but I had to chuckle when I read that Zoom is calling its workers back to the office for the first time since the pandemic.
First, let me assure you that the world is not coming to an end. Last month, I thankfully celebrated being on this earth for 62 years and further celebrated 37 years of being happily married, 38 years of being a commercial real estate broker and 7 years since two life threatening incidents. It’s also 40 years since the 1983 recession, 36 years since the 1987 recession, 27years since the 1996 recession, 22 years since the .com bubble burst, 16 years since the 2007 great recession…anyway you get my point…these things pass, as will whatever we face in the future.
Commercial real estate has been filled with ups and downs in 2023, and plenty of challenges. Interest rates are on the rise, regional banks are in disarray and office remains in turmoil. Disruption is the new normal. And wait, yes, we are entering an election year. Despite the disruption and turmoil, we at CDC stand ready to embrace opportunities that accompany these fast-changing economic conditions and the impact they have on the supply and demand for commercial real estate.
Although everyone might be feeling the end of the world, we all must realize that we someday will face the end of our life (I’ve already burned 2 of my 9 lives!). However, if you want the last laugh at the end, you should be very careful and use the tax code 1031 – also known as tax deferred exchanges. I prefer to say, “Defer till you die, refi to live.” In short, so long as you follow the time rules (45 days to identify/180 days to close) and you buy properties greater in value and with equal or greater debt, you don’t have to pay any taxes. But here is the kicker, when you die there is a step up in basis and your heirs don’t have to pay any of the taxes – too bad you have to die to implement this strategy!
An area that we find investors not aware of is called depreciation recapture. Most people have held property long enough (1 yr +) that their gain is a long-term capital gain (taxable at 15% or 20%). What many don’t realize or understand is that there is also a tax on the depreciation recapture (so all that depreciation you took to shelter income, comes back to be taxed when you sell.).
When real property is disposed of in a taxable sale, the total amount of straight-line depreciation taken by the taxpayer, up to the extent of gain recognized in the sale, is taxed as ordinary income (up to 25%). In other words, the tax benefit during the taxpayer’s ownership of the property is recouped, or “recaptured,” by the IRS. Additional depreciation is recaptured at the applicable income rate, without a 25% cap.
In a 1031 exchange, depreciation is recaptured to the extent the value of depreciable property acquired as replacement property is of a lesser value. What this means is that when utilizing a 1031 exchange, a taxpayer must acquire real property of equal or greater value to the property sold, and the property must also contain depreciable property (i.e., improvements) of equal or greater value to the depreciable property sold, in order to defer both capital gains and avoid depreciation recapture.
It is important for taxpayers to be aware that they can fully defer their capital gains by acquiring property of an equal or greater value to the property they sold, while not deferring all of their depreciation tax liability, because the replacement property did not have a sufficient value of depreciable property. In other words, depreciation recapture can trigger tax liability, even if a taxpayer acquires like-kind property of an equal or greater value to their relinquished property in a 1031 exchange.
One of the most important takeaways is that an investor can have a taxable event when completing a 1031 exchange, even if they reinvest all their proceeds and buy up in value, because their transaction triggers depreciation recapture. Most often, this is seen where a taxpayer exchanges out of improved property, into unimproved property that has no depreciable improvements (i.e., vacant land). In such a case, there may be depreciation recapture, depending on the type and amount of depreciable property that was owned as part of the relinquished property. It is essential that when planning a 1031 exchange, investors consult with their tax advisor early on in the process to analyze their tax liability, and what replacement property must be acquired in order to fully defer all gains (both capital gains and depreciation).
So, in short again, “Defer till you die, refi to live.”
Nick’s Numbers
As the campaign rhetoric increases on our trade relationships with China, we will continue to see an increase in U.S. imports from Mexico. U.S. imports from Mexico have surged since early 2022 thanks to tariffs doubling on Chinese goods and the signing of the USMCA in 2018. Since February of 2023, U.S. goods imported from Mexico have exceeded imports from China. This is great news for all San Diego real estate markets. Here is a chart to illustrate my point.
If you would like an analysis of your properties’ value or discuss what you should be doing with regard to interest rates or inflation and their impacts on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
Well two things are rising in commercial real estate. One, cap rates. We have now seen three consecutive quarters of rising cap rates. This is the first time since the Great Recession and a sign that investors are requiring higher yields to purchase a property. The second thing increasing is tenant improvement allowances. First, costs for labor and materials are higher and with more vacancy landlords are having to dangle larger allowances to attract tenants to rent space.
As we approach the opening of college football season, I have really enjoyed watching Deion (Neon Deion) Sanders approach the turnaround of the University of Colorado football program. The NFL legend has kicked a bundle of players off the roster and recruited dozens more.
His reason? “They didn’t love football. It is hard to be effective if you don’t love it, if you don’t want to live it. That’s tough.” He added that a number of his former players had “dead eyes,” indicating their love of the sport was gone. Let me just tell you, there are no “dead eyes” at CDC and when the going gets tough, the tough get going.
I hope you enjoy the rules of getting old…
21 Rules for a Good Old Age
1. It’s time to use the money you saved up. Use it and enjoy it. Don’t just keep it for those who may have no notion of the sacrifices you made to get it. Enjoy the present moment. The sand in the clock may run out at any moment.
2. Stop worrying about the financial situation of your children and grandchildren. You’ve taken care of them for many years, and you’ve taught them what you could. You gave them an education, food, shelter and support. The responsibility is now theirs to earn their way.
3. Keep a healthy life with moderate exercise (like walking every day), eat well and get your sleep. It’s easy to become sick, and it gets harder to remain healthy. Keep in touch with your doctor, get tested even when you’re feeling well. Stay informed.
4. Always buy the best, most beautiful items for your significant other. The key goal is to enjoy your money with your partner. One day, one of you will miss the other, and the money will not provide any comfort then. Enjoy it together.
5. Don’t stress over the little things. You’ve already overcome so much in your life. You have good memories and bad ones, but the important thing is the present. Don’t let the past drag you down or the future frighten you.
6. Regardless of age, always keep love alive. Love your partner, love life, love your family, love your neighbor, your surroundings, your country. We are never old as long as we have intelligence and affection.
7. Be proud, both inside and out. Don’t stop going to your hair salon or barber, do your nails, go to the dermatologist and the dentist, keep your perfumes and creams well stocked. When you are well-maintained on the outside, it seeps in, making you feel proud and strong.
8. Don’t lose sight of fashion trends for your age but keep your own sense of style. There’s nothing sillier than an older person trying to wear the current fashion among youngsters. You’ve developed your own sense of what looks good on you – keep it and be proud of it. It’s part of who you are.
9. Read newspapers, watch the news. Go online and read what people are saying. Make sure you have an active email account and try to use some of those social networks. You’ll be surprised which old friends you’ll meet. Keeping in touch with what is going on and with the people you know is important at any age.
10. Respect the younger generation and their opinions. They may not have the same viewpoints as ours, but they are the future and will take the world in their direction. Give advice, not criticism, and try to remind them of yesterday’s wisdom that still applies today.
11. Never use the phrase: “In my time.” Your time is now. As long as you’re alive, you are part of this time. You have been younger, but you are still you now, having fun and enjoying life.
12. Some people embrace their golden years, while others become bitter and surly. Life is too short to waste your days in the latter mode. Spend your time with positive, cheerful people, it’ll rub off on you and your days will seem that much better. Spending your time with bitter people will make you older and harder to be around.
13. Do not surrender to the temptation of living with your children or grandchildren (if you have a financial choice, that is). Sure, being surrounded by family sounds great, but we all need our privacy. They need theirs and you need yours. If you’ve lost your partner (our deepest condolences), then find a person to move in with you and help only if you feel you really need the help or do not want to live alone.
14. Don’t abandon your hobbies. If you don’t have any, make new ones. You can travel, hike, cook, read, dance. You can adopt a cat or a dog, grow a garden, play cards, checkers, chess dominoes, golf. You can paint, volunteer at an NGO, or collect certain items. Find something you like and spend some real time having fun with it.
15. Even if you don’t feel like it, try to accept invitations. Baptisms, graduations, birthdays, weddings, conferences. Try to go. Get out of the house, meet people you haven’t seen in a while, experience something new (or something old). But don’t get upset when you’re not invited. Some events are limited by resources, and not everyone can be hosted. The important thing is to leave the house from time to time. Go to museums, go walk through a field. Get out there.
16. Be a conversationalist. Talk less and listen more. Some people go on and on about the past, not caring if their listeners are really interested. That’s a great way of reducing the desire to speak with you. Listen first and answer questions, but don’t go off into long stories unless asked to. Speak in courteous tones and try not to complain or criticize too much unless you really need to. Try to accept situations as they are. Everyone is going through the same things, and people have a low tolerance for hearing complaints. Always find some good things to say well.
17. Pain and discomfort go hand in hand with getting older. Try not to dwell on them but accept them as a part of the cycle of life we’re all going through. Try to minimize them in your mind. They are not who you are, they are something that life added to you. If they become your entire focus, you lose sight of the person you used to be.
18. If you’ve been offended by others, forgive them. If you’ve offended someone – apologize. Don’t drag resentment around with you. It will make you sad and bitter. It doesn’t matter who was right. Someone once said, “Holding a grudge is like taking poison and expecting the other person to die.” Don’t take that poison. Forgive and move on with your life.
19. If you have a strong belief, savor it. But don’t waste your time trying to convince others. They will make their own choices no matter what you tell them, and it will only bring you frustration. Live your faith and set an example. Live true to your beliefs and let that memory sway them.
20. Laugh. Laugh A LOT. Laugh at everything. Remember, you are one of the lucky ones. You managed to have a life, a long one. Many never get to this age, never get to experience a full life. But you did. So, what’s not to laugh about? Find the humor in your situation.
21. Take no notice of what others say about you and even less of what they might be thinking. They’ll do it anyway, and you should have pride in yourself and what you’ve achieved. Let them talk and don’t worry. They have no idea about your history, your memories, and the life you’ve lived so far. There’s still much to be written, so get busy writing and don’t waste time thinking about what others might think. Now is the time to be free, at peace and as happy as you can be!
AND REMEMBER: Life is too short to drink cheap wine.
