Why Not a Canadian version of the 1031?

canada.com

This story on canada.com is worth a read. Everyone should be talking to their MP about the necessity of changing how investment properties are taxed at the time of sale. I know from my own commercial real estate practice (this happened to me today!), that there are sellers out there sitting on millions of dollars in real estate that they can't 'afford' to sell because of the tax implications. Imagine owning a retail plaza worth about $15.5M and being unable to sell it because your accountant has advised you that you will be immediately liable for a $6M tax bill!

Let's do the math: for a building to be worth $15.5M, it should be earning about $1,300,000 per year in net income if we apply a capitalization rate of somewhere between 8% and 8.5%. If we take $15,500,000 and subtract $6,000,000 we're left with $9,500,000 (without considering brokerage fees, legal fees and closing costs). If we go back to marekt with that money and reinvest at similar rates of return, you'll soon realize that you just took a rather large haircut - to the tune of about $500,000 per year in income!.

So where is the incentive to sell and reinvest and thereby stimulate the economy?

Our government needs to take a long hard look at this because, in the long run, more money will be made from the spin-off of reinvestment, like renovations and remodelling, than will be lost in initial tax deferrals.