For Daniel Wagner, SVP Government Relations of The Inland Real Estate Group, the 1031 Exchange program is so vital to the country’s economic recovery, he shares in full detail with us below why it would be a big mistake for the Biden Administration to repeal parts of the 1031 program.
Daniel also discusses why members of Congress and their staff do not understand the program’s benefits to the country. “This is not a question of politics or party,” shared Daniel in a previous blog with us. “Rather, this is a question of sound, common sense policy, and we need to speak up now for a vital part of our tax code that has been an anchor to our economy and a job creator for the last 100 years.”
Daniel Wagner: “Internal Revenue Code Section 1031 Like-kind-exchange has been a part of our tax code for 100 years and while the 2020 campaign rhetoric threatens its existence, I am confident it will continue to be a mainstay for our real estate industry. The following are the reasons why:
- Our economy is in a precarious position due to the COVID crisis and President Biden’s most important job is to save American lives by rolling out a more efficient vaccination process and then repairing the damage COVID has done to our economy. Below are two independent studies that outline the importance of like-kind exchanges:
- Ling-Petrova Studies Summaries and Synopsis of EY Study highlight the importance of the 1031 as to the micro- and macro- economic impact to our real estate economy.
- Elimination of LKEs would generate little in the way of additional tax revenue
- Liquidity would be reduced (holding periods would increase)
- Less efficient allocation of scarce resources (lock-in effect)
- Less ability for (especially small) investors to reposition portfolios
- Prices in some markets would decrease in the short run
- Secondary effects would include decreased employment in real estate and related sectors
- Bottom Line: Repeal of the 1031 Like-kind-exchange would harm our economy and stagger the commercial real estate sector at the worst possible time and not produce the desired tax revenue for the U.S. Treasury.
- Ling-Petrova Studies Summaries and Synopsis of EY Study highlight the importance of the 1031 as to the micro- and macro- economic impact to our real estate economy.
- The coalitions supporting the 1031 Like-kind-exchange not only include the real estate industry but also the agricultural and land conservation communities as well. There are numerous real estate associations supporting 1031 like-kind exchanges, but the largest trade association is the National Association of REALTORS. They surveyed their 1.4 million members and found:
- The National Association of REALTORS study
61% of REALTORS report they have done 1031 Exchanges and 52% of properties sold in a like-kind exchange were residential properties 27% single-family homes for rent, 15% apartment buildings, 10% condominium units. This highlights the fact that most exchanges are for small investors and businesses.
The American Farm Bureau Federation States, “Without Section 1031 like-kind exchanges, some farmers and ranchers would need to incur debt in order to continue their farm or ranch businesses or, worse yet, delay mandatory improvements to maintain the financial viability of their farm or ranches.
Conservation easements are used for several reasons, including wildlife and riparian habitat preservation, prairie restoration, mitigation of water quality issues, erosion prevention, creation of green belts and public recreation opportunities. IRC §1031 encourages landowners to convey title or permanent easements on sensitive acreage to achieve these important conservation goals.”
A major reason why the 1031 like-kind exchange is often found on lists of tax provisions that should be repealed is that most people are not familiar with it and even many Members of Congress and their staff do not quite understand how it works or how it benefits the economy.
Thus, a major key to preserving the like-kind exchange is to educate policymakers as to the importance of the provision. You can help by reaching out to your senators and representatives and sharing your personal experiences with how the 1031 like-kind exchange has helped your clients, the community, and helped increase jobs. This can convince them that now is exactly the wrong time to do away with a tool that provides flexibility and encourages investment. For more information, go to www.1031.org and under the advocacy section it will give you the 1031 talking points and how to find who represents you in Washington.”
