ITHACA, N.Y. — In Southwest Ithaca over the past few weeks, local businessman Phil Maguire has been rather busy as of late, purchasing multiple properties in million-dollar deals.

Maguire, the president of the Maguire Family of Dealerships automotive sales firm, purchased 340 and 344 Elmira Road for $1.375 million on November 22nd, and 100 Commercial Avenue for $4.65 million on December 1st.

340 Elmira Road is the 4,480 SF Burger King fast food restaurant, 344 Elmira Road is 2,117 SF building home to Fat Jack’s BBQ (former Garcia’s), and 100 Commercial Avenue is the 26,146 SF former Maine’s grocery, and currently home to Harbor Freight Tools. The three buildings are located on lots adjacent to each other, next to the entrance to Southwest Park, which has been under discussion as a potential site for the new car dealerships that Maguire has wanted to build in the city.

Maguire paid a bit above assessment – the Burger King and Fat Jack’s are assessed at $875,000 and $325,000 respectively, and 100 Commercial Avenue is assessed at $4.1 million. The amounts Maguire paid aren’t high enough above assessment to suggest development plans, and Maguire said about as much when asked about the big buys.

“We positioned our Carpenter Business Park proceeds into a 1031 exchange with intent to reinvest into like-kind properties. Our decision to purchase was solely based on speculative investment perspective, proximity to existing Maguire operations, Southwest Park and Route 89 development possibilities. We do not have immediate plans to convert the properties into a car dealership and have excellent tenants with leases in place,” said Maguire. Long story short, the purchases are not directly related to the Southwest Park plan, and the restaurants and tool store should be hanging around for a while yet.

A 1031 exchange refers to section 1031 of the IRS tax code. It allows a real estate investor to avoid paying capital gains taxes when they sell an investment property, by reinvesting the proceeds from the sale into properties of like kind and equal or greater value. Capital gains taxes are the taxes on the profit made by selling a property for more than what the investor paid for it, and “like kind” means they have to be the same general type of investment, so you can do a 1031 if it’s real estate for other real estate, but not if it’s say, real estate for a Ferrari or the Mona Lisa.

Here’s what it’s like in the context of Maguire’s purchases. Remember how Maguire paid a little over $2.7 million for the Carpenter Business Park property in August and September 2015, and that he sold the Carpenter land for $10 million in June 2017? With that sale in the books, Maguire has to pay a capital gains tax on the profit, which is $7.3 million minus the closing costs (a small percentage) and any depreciation and capital improvements to the property (Carpenter was vacant land when Maguire bought it, and was still vacant land when he sold it, so this isn’t much).

So Maguire was looking at a hefty tax bill. However, following the rules of 1031 exchanges and investing in like-kind properties, he identified no more than three investment properties in a certain value range within 45 days, and purchased them within 180 days, allowing him to defer payment of most of the capital gains tax until he sells those properties (which, given the Southwest Park plan, is unlikely).

In fact, if he gives the properties to his heirs in a will, the tax may never need to be paid. The heirs receive the property from the 1031 exchange at the “stepped up” fair market rate value, and all deferred taxes are erased. One might call it a tax loophole of sorts, but it’s all legal.

Now, adding up the purchases, they come to $6.025 million, meaning there’s still over $1 million in his pocket. That’s called “boot”. He has to pay the capital gains taxes on boot. But it’s a lot easier to pay taxes on about $1.3 million than it is on $7.3 million.

Apart from the tax benefits, let’s go back to the other reasons Maguire would purchase these – not only do they have stable tenants on leases, they are right next to the property he’s considering for his new dealerships. They could be incorporated into his projects and give him company some street frontage on very busy Route 13, a strong asset to have when a high-visibility car dealer is trying to overcome Southwest Park’s relative seclusion.

However, those dealerships are dependent on negotiations with the city, and it doesn’t seem like there’s been much movement with that plan lately.

“Regarding Southwest Park, your guess is as good as mine (probably better) on its future. If given the opportunity, we would consolidate and expand our operations as previously presented to Council,” said Maguire.

Brian Crandall

Brian Crandall reports on housing and development for the Ithaca Voice. He can be reached at bcrandall@ithacavoice.com.