For more articles on tax policy
View these articles and more at
“Taking Advantage of Brownfields Tax Credits,”
By Warren Kirshenbaum
“Beware of the Pitfalls of Receivership Deals,”
By Kelley McLaren
“Reverse 1031 Exchanges: Avoiding Capital Gains
Taxes in a Seller’s Market,”
By Phil Sblendorio
“A Powerful Tax Tool,”
By Dan Black
The separate study conducted by the university researchers concluded that repeal of the 1031 provision
would lower real estate values, push up rents, lengthen holding periods and require a greater reliance on
debt than equity. Those findings are consistent with
NAR’s research. The NAR survey found that 83 percent
of those asked believe a repeal of the 1031 exchange
provision would increase holding periods by more
than 20 percent of a property’s useful life.
Reasoned tax reform
America does need tax reform. But policymakers
should first do no harm. It makes no sense to repeal
job-creating provisions, such as the like-kind exchange,
in an effort to create a tax system that is pro-growth.
Unfortunately, nothing in today’s political climate
is ever completely safe. Members of the industry
must continue to make the case to lawmakers and
policy experts that 1031 exchanges are even more
important today than they were when they were first
enacted in 1921.
Contrary to the arguments of those supporting repeal, the 1031 exchange isn’t a loophole. It provides for
the deferral of taxes, not the avoidance of taxes. Property owners will eventually pay taxes on their capital
gains when the property is ultimately sold for cash. In
fact, the like-kind exchange study conducted by the
university professors reported that in 88 percent of the
cases examined, investors disposed of properties acquired in a 1031 exchange through a taxable sale. And
the amount of taxes paid in these subsequent sales
are, on average, 19 percent higher than they would
have been had the like-kind exchange not taken place.
The 1031 exchanges simply allow investors and
businesses to keep assets in investment properties
instead of liquidating them or converting them to
another asset class. The exchanges are an important
incentive that help create jobs and increase economic
growth, issues that matter to communities, mortgage
professionals and Realtors. ■
Stop any ordinary person on the street and ask what 1031 like-kind exchanges are, and you’re likely to get a blank stare. It’s just not something the average person needs to
know. In the world of commercial real estate, however,
they’re a big deal.
Section 1031 of the tax law allows for the deferment
of the capital-gains tax when one piece of investment
or business property is exchanged for a similar, or like-kind, property. These exchanges have been critically
important to the economy since the last economic
downturn — as they have been for years prior to that.
The 1031 exchange provision has been part of the U.S.
tax code for nearly 100 years, but recently has been the
target of pending legislation in Congress that would
repeal or sharply limit its application.
Fortunately, we’re turning a corner on the Great
Recession. In fact, according to a recent National Association of Realtors (NAR) Commercial Real Estate
Outlook report, there are real signs of improvement.
Macroeconomic conditions improved through the
first half of 2015, with the U.S. gross domestic product
advancing at an annual rate of 3. 9 percent in this past
second quarter, thanks to higher consumer spending,
exports, nonresidential and residential investment,
and government spending.
The uptick in macroeconomic performance has
translated into an improving commercial real estate
market. Demand for commercial-lease space has been
moving higher, an improvement from the soft performance we saw in the first quarter of 2015, and demand
for multifamily properties continues its upward path.
But the progress the market has experienced hasn’t diminished the importance of 1031 property exchanges.
In a recent NAR survey, 40 percent of Realtors said they
had been involved in transactions that would not have
occurred if it weren’t for the 1031 exchange. On top of
that, 56 percent said they had been involved in projects that would have been smaller in scale absent the
1031 exchange provision.
This is important for all real estate professionals
working in the commercial space, including mortgage
originators, Realtors, lenders and investors. Another
industry-sponsored study — conducted by University of Florida and Syracuse University researchers and
released this past July — shows that 6 percent of all
commercial real estate transactions involve like-kind
exchanges, and in high-tax states like California, Oregon, Colorado and Arizona, like-kind exchanges make
up 10 percent to 18 percent of transactions.
Clearly, the 1031 exchange provision is of wide-
ranging importance for the real estate industry. But
real estate professionals aren’t the only ones who
benefit. Although the phrase “1031 like-kind exchange”
might sound like something that only an accountant
could get excited about, they deliver big benefits to
the broader economy as well.
NAR’s survey found that each like-kind exchange in
which Realtors participated created between 10 and
35 new jobs, largely from spending on building improvements following an acquisition. More broadly,
projects that moved forward with the help of a 1031
exchange helped reduce overall financial leverage,
while driving investment and economic development
in a range of communities.
Chris Polychron is an executive broker with 1st Choice
Realty in Hot Springs, Arkansas, and immediate past president of the National Association of Realtors, a trade association representing over 1.1 million members involved in
all aspects of the residential and commercial real estate
industries. At 1st Choice Realty, Polychron specializes in
residential and commercial brokerage. Reach him at
Proposal to End Popular
Tax Exemption Draws Scrutiny
Real estate industry players cite economic and employment
benefits in support of 1031 like-kind exchanges
By Chris Polychron