A client recently completed a 1031 exchange. The replacement property is approximately 27 acres near Tampa.  It will be a little over a year before we are ready to develop this property.  The prior owner had an agricultural exemption on the property which he maintained by giving a farmer grazing rights for his cattle.  Last week, the client asked me to prepare a new Grazing Agreement with the farmer.  “Sure”, I thought.  I was certain I had done one before.

I had to dig way back in my form files, the ones kept on CD, to find one. That got me thinking, where have all the cows gone?  It wasn’t too long ago that here in South Florida there were plenty of cows, horses, goats, sheep, emu, pigs and other livestock grazing in and around our neighborhoods.  I grew up in Hollywood and went to school in Davie.  Davie was (and still claims to be) horse county.  My school was surrounded by, and smelled like cows.

My wife and I raised our kids in Cooper City. There were pastures all around “The Coop”.  Our development was a former pasture.  It was not an uncommon site to see sheriff’s deputies corralling stray cows that had escaped their pasture.  Police cars would corner cows against fences and trees while waiting for the farmer to shepherd the cow home.  These sites were common all over South Florida for many years.  Slowly, the cows and horses moved further west and now, the farms and pastures are few and far between, limited to small, rural communities.  If you miss that life, you need to head north, towards Lake O, to Ocala and to the Panhandle.

Where have the cows gone? Open space has vanished in South Florida and my need to draft grazing agreements has long past.  The big dairy farmers have cashed out – selling their land for development.  The small open fields used for grazing or nurseries or other agricultural uses have been snatched up more recently for more small McMansion communities.  The idea of throwing a couple of cows or goats on your property to claim an agricultural exemption in South Florida is not standard practice anymore.

Is this a bad thing? Yes and no.  We certainly miss the open space.  But, it is hard not embrace the growth and progress and what the community has become and can become.  Cows do add character and I hope that we don’t loss all of our grazing areas.

President Trump is scheduled to make a big announcement about his tax plan later this week. No details have been released, but the president’s tweets about the announcements have been filled with his trademark superlatives.  One thing is for certain.  The Trump tax plan will affect real estate.  The question is, however, whether the real estate developer in chief’s proposals will benefit the real estate industry.  Signals, so far, indicate that they will even though such moves might be contrary to the president’s own tax policy.

The biggest issue affecting real estate is the mortgage interest deduction. President Trump has stated several times that he does not intend to eliminate this popular deduction for business or for homeowners.  For homeowners, supporters of the deduction have always argued that it is designed to encourage homeownership by making the cost of homes more affordable.  However, the opposite is true.  The deduction targets the wealthy who are already homeowners and, it is regressive.  It does not reach low and moderate income workers.  The National Low Income Housing Coalition supports reducing the tax break from $1,000,000 to $500,000 and changing the deduction to a credit.  This would allow 15 million more low and moderate income borrowers to get a tax break.

On the business side, the White House has also signaled that it is considering changing the rules regarding expensing (deductibility) of capital expenditures. The tentative proposal would allow the immediate expensing of capital expenditures.  Coupled with the continuance of deductibility of mortgage interest, this would allow double dipping.  A borrower could borrow large sums of money for capital improvements and deduct 100% of the cost of the improvements that same year instead of depreciating the cost over the life of the improvements.  And, the borrower could deduct the interest over the life of the loan as paid.  the cost to the federal budget under this plan would be staggering and contrary to all of the president’s stated budgetary goals.

Another real estate tax provision which could be changed in the Trump proposal, but so far, has not been discussed, is the provision allowing for “active” real estate investors to offset real estate losses against other income. President Trump has been very successful at this strategy according to the 1995 tax returns that were released to the press late last month.  Elimination of this provision would have a net positive affect on the budget.

Finally, the president has not commented on the future of 1031 like-kind exchanges. This is popular method used by real estate developers and investors which allows the deferrals of capital gains upon the sale of real property by substituting a new property upon the sale of a property.  real estate love it.

Tax reform is not an easy job. There is so much more to is than politicians and the media want us to believe or allow us to understand.  More importantly, it is so much more than setting tax rates and debating whether to continue capital gains tax.  To have meaningful tax reform, the president and Congress must look at the entire tax code and put aside their own self interests.  While selfishly, I would love to make real estate the best place to invest money from a tax stand point, it would be foolish and naïve to think that creating a separate code for real estate investors is best for our overall economy.

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