May has arrived, and with warmer temperatures on the way, enjoy the 60 and 70 degree days while you still can! In this month’s update, we will discuss a disappointing jobs report, a fading pandemic (fingers crossed!), new property management legislation, and possible changes to section 1031 of the IRS code.
- April Jobs Report - The U.S. economy added 266,000 jobs in April, which would be fantastic news in an ordinary month, but not so much in a month where we are trying to claw our way out of a pandemic. In this case, the figures fell well short of expectations. How short? Well, economists had predicted 1 million new jobs to be added so…yikes. The slowdown in America’s jobs recovery saw the unemployment tick up from 6.0% to 6.1% and marks the slowest monthly improvement since January.
- Jobless Claims - New jobless claims fell to a pandemic-era low of 473,000 as America digs out from a year of hibernation. Continuing claims also beat estimates at 3.655 million. Locally, new claim numbers were flat from the previous week. While the number of new claims remains above pre-pandemic levels, they have fallen by nearly half since January which is welcome news following a disappointing April Jobs report.
- COVID-19 Update - If you haven’t checked the graph in a while, the number of new COVID-19 cases in Utah has fallen off a cliff! It appears that the spread of the virus simply can’t keep up in the face of rapid vaccinations (42.5% of the total Utah population has received at least a first vaccine dose, and 33.1% of the population is now fully vaccinated). Let’s all hope this trend continues!
Are 1031 Exchanges Going Away?
It’s no secret that the past 12 months have been a rollercoaster ride for those of us in the world of investment real estate. The global pandemic brought with it uncertainty, calls to cancel rent, several eviction moratoriums, and now, the possibility of changes to section 1031 of the IRS code.
What is a 1031 exchange?
In case you are unfamiliar with 1031 exchanges, they essentially allow you to “exchange” one like-kind property for another and defer any capital gains taxes (you can view full details from the IRS here). The specifics of a 1031 exchange exceed the scope of this article (for more information, please contact a tax professional or review the links above), but needless to say, they can be a real estate investor’s best friend. The ability to purchase an investment property, sell it years later at a higher price, and roll your equity into another property without paying taxes on that gain is one aspect that makes real estate investing so appealing.
What is happening?
Nothing yet, but that could change in the near future. The American Families Plan, which is part of President Biden’s $2 trillion infrastructure plan to help the nation recover from the pandemic, addresses federal investment in childcare, paid medical leave and education. One of the ideas to pay for that plan includes eliminating 1031 exchanges when gains exceed $500,000 or for individuals with incomes in excess of $400,000.
Will it pass and when might it happen?
Of course, the correct answer is no one knows for sure, but if you read between the lines (as Todd Pajonas with GlobeSt.com did) it could happen sooner than later. Such a proposal is unlikely to receive much Republican support, and with the party of the President traditionally losing House and Senate seats in the midterm elections, acting quickly might be the President’s only option. Of course, time will tell if the Biden administration will prioritize tax reform over other policy items such as getting the pandemic under control, health care or criminal justice reform.
Do other options exist?
Yes. Real estate and tax professionals are some of the most creative people you’ll ever meet and there are alternatives. Another work around involves selling a property, buying another in the same year and using the bonus depreciation from a cost segregation study to offset the capital gains (always consult a reputable tax professional and explore your options before you sell). Regardless, 1031 exchanges would be sorely missed.
At the end of the day, 1031 exchanges have been around since 1921 and are a great tool to help real estate investors build wealth. Let’s hope they are still around in another 100 years.
Utah Real Estate Market
It seems like every month, we see more and more real estate articles like this one. Simply put, the Utah real estate market is as crazy as it’s ever been. We’ve experienced roughly 29.6% year over year median home price appreciation (13.9% since January!) for single family homes in Salt Lake, Utah and Davis counties.
Median Sold Price
Monthly % Change: Up 3.7%
Monthly % Change: Up 13.9%
Average Number of Active Listings
Monthly % Change: Up 41.6%
- HB 68 Changes. Effective May 5, 2021, HB 68 brought a few changes for rental property operators in Utah. We mentioned these changes in a previous update, and most of the changes involve disclosing estimated costs in advertising which we were doing anyway, but there was another notable change. Late fees are now capped at 10% of the monthly rent no matter what your lease says. This isn’t a big deal as our leases have had such a cap for years, but this will impact any owners with non-Wolfnest lease that includes daily late fees or allows an amount in excess of 10% of the monthly rent amount.
- Eviction Moratorium Ruled Unconstitutional - A federal judge in the U.S District Court for Washington D.C. ruled that the CDC’s eviction moratorium is unconstitutional and therefore invalid. While other courts around the country have previously issued rulings striking down the CDC’s moratorium on evictions, this Federal Judge specifically vacated the CDC order in its entirety, making it not only invalid as related to the specific people in that case, but striking down the CDC’s order as it relates to landlords and tenants nationwide. Although this is a significant win for the housing industry and landlords throughout the country, the CDC has already filed an appeal and the Federal Judge has placed a stay on the ruling until at least May 12th. Stay tuned, but hopefully this is the beginning of the end of the seemingly endless moratorium on evictions.