Should Congress Trade in 1031 Exchanges?
- Jul 13, 2015
By Barbra Murray, Contributing Editor
The Real Estate Roundtable, campaigning to dissuade Congress from abolishing a stipulation under the U.S. tax code that’s critical to the real estate market, has some new ammunition in its arsenal. The organization has just come out in support of “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate,” a new study detailing the benefits of retaining the provision and the negative consequences of eliminating it.
“Good laws require good facts and as Congress continues to discuss tax reform, we want the facts on exchanges to be well known and better understood,” Jeffrey DeBoer, president & CEO of Roundtable, told Commercial Property Executive.
Since 1921, the like-kind exchange has permitted taxpayers to defer tax when exchanging one property held for investment or business purposes for another property that is similar, or of a like kind. As the Roundtable and its coalition partners noted in a letter to congressional tax-writers in March, like-kind exchanges, which are utilized by companies of all sizes in various industries, are essential to the efficient operation and continued vitality of countless American businesses. Additionally, exchanges facilitate taxpayers’ ability to exchange a property for more-productive property; to diversify or consolidate holdings; and to transition to meet changing business needs.
In their research, the study’s authors — David Ling of the University of Florida and Milena Petrova of Syracuse University — examined in excess of 1.6 million real estate transactions totaling more than $4.8 trillion over an 18-year period ending in 2014. They scrutinized every aspect of the provision’s impact, taking into account the positives and the negatives, and determined that the termination of like-kind exchanges would be substantially detrimental–in more ways than one.
“Although the present value of tax revenue losses associated with real estate like-kind exchanges is relatively small in magnitude, the elimination of exchanges would disrupt many local property markets and harm both tenants and owners,” the authors assert in the report. They also found that the effect of the proposed changes to the provision would be far-reaching.
“Our empirical analysis demonstrates that like-kind exchanges are associated with increased investment, shorter holding periods, and lower leverage. Therefore the removal of exchanges will lead to a decrease in investment, an increase in holding periods (decrease in liquidity) and increase in the use of leverage to finance acquisitions. These micro effects are likely to have macro-economic consequences as well.”
In a nutshell, Ling and Petrova concluded that the cancellation or limitation of like-kind exchanges would deter as well as prohibit new and ongoing real estate and capital investment.
“This report demonstrates how widespread and how valuable like-kind property exchanges are to the overall economy,” DeBoer added. “It shows that exchanges are used in every state and by large and small real estate owners and have multiple positive impacts to jobs and local economies. The report will also be useful to people in the real estate business as they discuss tax reform ideas with policymakers.”