Section 1031 like-kind exchanges stimulate economic growth. Repealing or restricting 1031 in the guise of tax reform could quash the nascent real estate recovery.
CHICAGO, April 2, 2013 /PRNewswire/ — After several years, real estate values are beginning to recover and activity is steadily increasing. It’s a promising trend that needs to be supported, not thwarted. IRC Section 1031 like-kind exchanges are one of the best ways to support it. Improving conditions in the real estate market could be reversed if tax reform efforts in Washington D.C. impact taxpayer’s ability to utilize Section 1031, according to David Brown, President of the Federation of Exchange Accommodators (FEA), a national trade organization for professionals specializing in the field.
Property values in the commercial real estate sector are not rebounding as quickly as the general housing market. Investors, lawmakers, REALTORS® and other real estate professionals continue to search for ways to encourage investment in commercial property and increase transaction volume. Like-kind exchanges under IRC Section 1031 definitely help – eliminating them would certainly hurt.
The use of a Section 1031 like-kind exchange has historically been the vehicle that has ensured continued investment in commercial, agricultural and rental real estate. Section 1031 is also substantially used by businesses to exchange non-real estate assets, including trucks, trailers, containers, railcars, airplanes, agricultural equipment, other heavy equipment, livestock and other assets. A Section 1031 Exchange allows investors to upgrade and expand their facilities and equipment, redeploy assets to other geographical areas, and capitalize on new labor pools. At the same time, a Section 1031 Exchange requires that the proceeds received from the sale of domestic real estate be reinvested within 180 days in property within the United States – thereby serving as a critical stimulus to the real estate market and a vehicle to keep investment dollars on our shores.
Repealing or restricting IRC Section 1031, in the guise of tax reform, has the potential to quash the nascent real estate recovery. The House Ways and Means Committee has established eleven working groups that are exploring various tax reform initiatives – including a possible repeal or modification of Section 1031. Considering that the maximum federal capital gains tax rate was raised by two-thirds this year, and upon factoring in state taxes, repeal of or substantial changes to Section 1031 could force property owners to hold properties rather than sell, perhaps contributing to further erosion of market conditions.
“Like-kind exchanges stimulate economic growth,” according to Brown. “Repealing or curbing the applicability of Section 1031 would critically injure businesses, investors and the real estate market which is just now showing signs of getting back on its feet.” Brown is quick to point out that Section 1031 is not a tax dodge. Section 1031 allows investors to generate additional equity so long as the investment stays in place. Capital gains taxes become due whenever taxpayers don’t use all of the funds received from a sale or ultimately “cash out” of their property.
Tax reform efforts are underway in both the House and the Senate. While Congress is not expected to enact reform legislation in the immediate future, decisions made in the coming weeks and months on issues, such as Section 1031, will be extremely difficult to reverse in the endgame of reform legislation. The Federation of Exchange Accommodators (FEA) has worked diligently to educate Members of Congress and other policymakers on the importance of Section 1031. These efforts could be undone, however, as higher profile issues consume the attention of the House and Senate tax-writing committees.
The FEA is concerned that as tax reform discussions progress, Section 1031 property exchanges may be a target due to its score as a “tax expenditure.” The benefits of tax deferred exchanges to a myriad of economic sectors, including commercial / industrial and agricultural real property, manufacturing, transportation, equipment leasing, construction and energy, far outweigh the perceived loss of tax revenue. Section 1031 Exchanges are a proven economic stimulator and benefit taxpayers of all sizes. Section 1031 not only encourages reinvestment over profit taking, it provides a strong incentive to keep that investment at home, in the United States, invigorating the economy at large.
The House Ways and Means Committee has established an April 15 deadline for comments on a range of tax reform proposals. The email address for submitting comments is firstname.lastname@example.org.
Williams & Jensen
About the FEA
The Federation of Exchange Accommodators is the industry association for professional exchange facilitators, also known as QIs. FEA member companies facilitate tax-deferred exchanges of investment and business use properties under Section 1031 of the Internal Revenue Code for taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities. Members represent a broad spectrum of the industry, ranging from small, privately held businesses to large, publicly traded companies and banks, located in small towns to large cities across the nation.