Last week President Biden released the details of his $1.8 trillion American Families Plan, which includes a $500,000 cap on like-kind exchanges as a means to pay for the proposal. The results of a study of exchanges accommodated by IPE 1031 and other qualified intermediary companies over a five-year period indicate this proposal would effectively eliminate commercial real estate exchanges, as well as a large percentage of farm and ranch exchanges.
The Administration’s proposal is based upon a misguided view of the actual purpose and benefits of like-kind exchanges. Section 1031 is a tax deferral tool and not a tax avoidance loophole. Section 1031 encourages real estate transactional activity, and in doing so, is a powerful stimulator of the U.S., state and local economies. It is neither unfair nor abusive, and has been recognized by past Congresses as a critically beneficial economic tool since having been first enacted 100 years ago.
Like-kind exchanges are broadly used by taxpayers ranging from middle class individuals exchanging rental houses and small apartment buildings; farmers; small to mid-sized businesses; and taxpayers exchanging large commercial properties in major metropolitan areas. Industry studies have estimated that elimination of Section 1031 would depress the commercial and farm real estate economies. Further, given the Administration’s proposal to raise federal capital gains tax rates to 43% and eliminate the stepped-up basis, Section 1031 becomes indispensable.
Section 1031 is a relatively small revenue raiser with the economic benefits far outweighing its cost. Recent research by EY, LLP, has estimated that like-kind exchanges are expected to generate 568,000 jobs this year, including $27.5 billion of labor income and a total of $55.3 billion of value added to the U.S. economy. The economic impact of like-kind exchanges in their present form is a far better “pay-for” than eliminating this powerful stimulus.
Grassroots Action Is Needed Now: The following are some ways you can help with Section 1031 advocacy efforts:
1) Send a letter to Congress: A letter is available for you to send to your members of Congress urging them to preserve Section 1031. You can access the letter on the take action page of the 1031taxreform.com website: CLICK HERE.
2) Reach out to Congressional Members directly: Stakeholders and opinion leaders with connections to Congressional Members, especially Democrats, should initiate direct discussions with Members and their staff to advocate in favor of retention of Section 1031. Information about the benefits of Section 1031 can be found at www.1031taxreform.com.
3) Connect with your association: A broad coalition of real estate, farm, conservation and business associations strongly support Section 1031. Support your association’s efforts to show strength in numbers.