Middleton is also brokering the sale of part of the 260,000-acre La Escalera ranch south of Fort Stockton, Texas. San Antonio construction magnate Gerald Lyda benefited from a 1031 exchange when he bought the property in 1992 using his capital gains from selling a New Mexico ranch to cable television billionaire Ted Turner. In an interview archived at the University of Texas at San Antonio, Lyda said the transaction’s details were too complex for him, so he “spent over a hundred thousand dollars getting it done right through professionals.”
Lyda died in 2005; his widow and other family members have run La Escalera as a hunting ground, farm and Black Angus cattle ranch, while earning additional income leasing the property’s energy and mineral rights.
Now they’re among the largest land owners in the U.S., according to the Land Report, and they’re selling 35,000 acres at an asking price of $41 million to billionaire real estate mogul Stan Kroenke, Middleton said. Kroenke, who married into the Walton family of Walmart Inc. fame, owns hundreds of retail shopping outlets, as well as the Los Angeles Rams, the Colorado Avalanche NHL franchise, the Denver Nuggets NBA team and Britain’s Arsenal F.C. soccer team. A spokesman for Kroenke declined to comment for this story.
Real estate industry analysts say that 1031 exchanges involving ultra-wealthy purchasers tell only part of the story. Family farmers and ranchers routinely use exchanges to upgrade and sometimes reorganize their properties, said Roger McEowen, who teaches agricultural law and taxation at Washburn University School of Law in Topeka, Kansas.
‘Powerful Stimulator’
A cottage industry of lawyers, brokers and intermediaries has developed to allow smaller investors to reap tax savings from 1031 transactions. Tens of thousands of small investors each year put their capital gains in pooled investment vehicles, called Delaware Statutory Trusts, to purchase properties and develop real estate. A study funded by the real estate industry and based on voluntary data from buyers and sellers estimates that the average purchase price of properties bought using 1031 exchanges is $500,000 and that 88% of all exchanges ultimately lead to a taxable sale.
“Section 1031 encourages real estate transactional activity, and in doing so, is a powerful stimulator of the U.S. economy,” said Suzanne Goldstein Baker, co-chair of the government affairs committee at the Federation of Exchange Accommodators, which lobbies to preserve the policy.
While some publicly traded companies disclose their 1031 activity in broad terms in SEC filings and investor calls, most private companies that use the rule make few details public. In Trump’s case, specifics came to light during a legal battle in which he accused his partners of selling the properties for less than they were worth. Eric Trump and Trump Organization General Counsel Alan Garten didn’t respond to questions seeking comment on the company’s use of the rule.
The family of Trump’s son-in-law, Jared Kushner, also benefited from a 1031 transaction that will take the sting out of their plan to sell a building for less than they paid for it. In 2007, as the U.S. property market was reaching an apex, Kushner Cos. sold more than 16,000 apartments for $1.9 billion. That included about $1 billion of capital gain, Charles Kushner, Jared Kushner’s father, said in a December email to Bloomberg News. “As it is common practice in the real estate industry, we looked to take advantage of the 1031-exchange provision of the tax code,” the elder Kushner wrote.
The family then purchased a Chicago office tower for $275 million, allowing for the deferral of that much of the capital gain. Thirteen years later, the company now has an agreement to sell that Chicago property, too. Last year Kushner Cos. was in talks to do so for about $180 million, though the closing of the deal has been delayed, two people familiar with the transaction said.
It’s never a good deal to sell properties for less than their purchase price, but in this case, the 1031 rule will allow Kushner Cos. to continue to defer capital gains from the 2007 sale equal to the value of the Chicago building’s eventual sale price. “We intend to use the same 1031-exchange provision of the tax code to defer” taxes on that amount as well, Charles Kushner wrote, adding that the $28 million in cash that his company will take out of the building is greater than the $17 million it put in.
A spokeswoman for the company said last week that the sale is expected to close later this year.
‘First Salvo’
Biden may find that Trump is something of an unwitting ally in his attempt to roll back the tax break. By eliminating the 1031 break for transactions involving equipment and art, Trump’s 2017 tax law neutralized some prior support.
Some art investors chafed at “cherry-picking” real estate as the only industry that would retain the 1031 break, said Diana Wierbicki, global head of art law at Withersworldwide. “But there was also a sense that, if they can take it away from some, they can take it away from others down the road.”
For now the real estate industry doesn’t seem too concerned.
“They throw this in in every first salvo of budget or tax negotiations, and it historically has always come out, I think that will happen again,” Joe McBride, head of commercial real estate finance at Trepp, said on a recent episode of the data-and-analytics company’s podcast. “Let’s be serious. Every Democrat in Congress probably has some sort of real estate investments going on or they have many wealthy friends who do and wealthy lobbyists who do. So it would surprise me if this actually does go through.”
This article was provided by Bloomberg News.