Acquiring and improving commercial real estate requires large amounts of capital, and section 1031 helps real estate businesses grow and expand organically – with less debt.
GAINESVILLE, Fla. – July 25, 2015 – The Real Estate Roundtable says a recent economic study about like-kind exchanges (1031 exchanges, or Section 1031 of the U.S. tax code) proves their worth to the U.S. real estate market and illustrates some unintended negative impacts of proposals to scale back or repeal the nearly 100-year-old tax provision.
Drs. David Ling with the University of Florida and Milena Petrova with Syracuse University co-authored the study – The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate – based on their analysis of more than 1.6 million real estate transactions spanning 18 years (1997-2014). The total value of the transactions was $4.8 trillion (unadjusted for inflation).
"The new Ling-Petrova study demonstrates how critical like-kind exchanges are to the health and vibrancy of real estate activity in the United States," says Roundtable President and CEO Jeffrey DeBoer. "Acquiring and improving commercial real estate requires large amounts of capital, and section 1031 helps real estate businesses grow and expand organically – with less debt.
"In short, like-kind exchanges allow property owners to put more of their earnings back into the private sector – hiring workers, upgrading and improving properties, and generating much-needed economic activity," says DeBoer.
Like-kind exchange rules allow taxpayers to defer tax when they exchange one property held for investment or business use for other property of a "like kind." The exchanges contribute to a more dynamic real estate sector by eliminating potential "lock-in" effects (particularly in the case of less-productive assets).
As a result, the Roundtable says, like-kind exchanges foster increased investment and reinvestment activity; allow real estate owners to better allocate resources; and decrease debt levels in commercial and multifamily real estate transactions.
Additionally, 1031 exchanges help safeguard property values – which underlie local government budgets across the country – and help protect tenants by stabilizing rents.
"There is strong economic rationale for the like-kind exchange provision's nearly 100-year existence in the Code," the Roundtable and coalitions partners wrote to U.S. Congressional tax writers in March. "Limitation or repeal of section 1031 would deter and, in many cases, prohibit continued and new real estate and capital investment."
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