Recent Studies Show 1031 Tax-Deferred Exchanges are Still Valuable

Exchange house

The Institute of Real Estate Management recently published this article on the like-kind exchange tax provision in the Internal Revenue Code. The long and short of it? It’s a good thing for the American economy.

“The real estate industry’s use of the like-kind exchange tax provision is more important than ever, according to a new report released by the National Association of Realtors®. In “Like-Kind Exchanges: Real Estate Market Perspectives 2015” it was found that roughly 63% of Realtors® reportedly participated in a like-kind transaction in the past five years. In addition, between 10 and 35 new jobs were created by a like-kind exchange transaction. More than two-thirds of survey respondents said the repeal of the 1031 like-kind exchange provision would create an increase in financial leverage, and respondents said a repeal would result in the reductions of equity in real estate. Approximately 96% of respondents indicated real estate values would drop if the tax tool were repealed

Furthermore, an economic study, “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate,” was recently published that details the overwhelmingly positive impacts of 1031 like-kind exchanges. Doctors David C. Ling and Milena Petrova co-authored the study after analyzing more than 1.6 million real estate transactions totaling $4.8 trillion during the years 1997-2014.

Key highlights of the study include:

  • 1031 like-kind exchanges trigger more investment. Investors acquire replacement property that is roughly $305K-$422K more valuable.
  • 1031 like-kind exchanges generate substantial federal tax revenue. Some type of federal tax is paid the same year as the transaction in 34% of exchanges.
  • 1031 like-kind exchanges create jobs. As property is acquired and exchanges, various services are needed such as property upgrades and improvements requiring workers. Not to mention the financial service expertise involved in such transactions.
  • 1031 like-kind exchanges decrease debt of the investor. If the price of the replacement property is similar to the property being exchanged, there is a 10% reduction in borrowing during the acquisition.

Section 1031 like-kind exchanges are a valuable asset to the U.S. economy. Repealing them may result in tax increases for commercial property owners, a reduction in overall real estate activity, and a decrease in property values. Maintaining this tax provision is crucial to IREM Members and real estate practitioners nationwide.”