Keep 1031 Like-Kind Exchanges Working

Section 1031 like-kind exchanges are an overwhelming positive for the economy and are an important stabilizer during times of economic stress. The administration’s plan to restrict 1031 exchanges for real estate will have unintended negative consequences – particularly for local communities, small businesses, and multifamily renters.

Background: What is a 1031 Like-Kind Exchange?

Section 1031 is a longstanding and well-vetted feature of the tax code that allows taxpayers to defer capital gains via a like-kind exchange. When selling real estate an reinvesting the proceeds by purchasing a new property, business owners defer federal capital gains taxes and can instead use the savings to invest more in their property or business. The taxes are only deferred, not eliminated. A property owner who sells a building without reinvesting in another property will pay tax on their realized gains.

Why should Congress preserve 1031 treatment?

1031 isn’t a loophole. Section 1031 is a longstanding and well-vetted feature of the tax code.
Section 1031 only defers tax. It is a misconception that Section 1031 eliminates capital gains taxes for real estate investors – it is a deferral of tax payments to permit further investment into the economy. In fact, more than 80% of deferrals are one-time events. These taxes are not continually deferred.
1031 exchanges help small business owners build wealth. It is a further misconception that like-kind exchanges are only for the wealthy or large corporations – it is a useful tool leveraged by smaller private real estate investors that play an important role for their community.
Taxing 1031 will restrict job growth. Restricting like-kind exchanges would result in negative consequences and disproportionally affect those not involved in real estate investment. What’s more, the restriction of like-kind exchanges is expected to hinder selling activity, which will impact the generation of both federal and state taxes that further give back to the economy.
Taxing 1031 hurts more than helps. Ultimately, any expected revenue gain would be overwhelmed by the economic harm from reduced property values, decreased investment activity as well as lower state and local taxes and fewer jobs.

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