The idea of abolishing the 1031 like kind exchange programs is being discussed in Congress. Abolition of the programs would be devastating to the nation’s economy and commercial real estate owners, investors, developers and brokers. The present administration is looking for any and all ways to generate additional tax revenue, but they don’t seem to understand the value and transactional activity that the exchange program was specifically designed to create when it was enacted in 1921 (almost 100 years ago). The rules were put in place to encourage active reinvestments from people without fear of unfair taxation. In other words, the rules allow and encourage continual investment, which stimulates the economy as people roll additional money into new deals without being taxed on theoretical gains or losses. Let’s take a quick look at the consequences of removing the 1031 exchange tax law.
Decline in real estate values
If owners are facing negative tax consequences as a result of the 1031 repeal, they will be more motivated to hold on to assets and seek other non-real estate investments. Congress will have effectively increased taxes on all sound commercial real estate investments, which could lead to a recession similar to what occurred following the 1986 tax reform. Real estate will be less attractive given the tax issues associated with it, leading to declining demand and values.
Overall drain on economy
The 1031 like kind exchange program directly contributes to the velocity of the economy by encouraging real estate transactions and ever increasing investments into real property. These transactions support jobs in real estate, financial services, construction, heavy equipment, manufacturing, and many other industries. Fewer real estate transactions will result in fewer jobs and less money circulated throughout the economy.
Lack of additional tax revenue
Given depreciation, the estate tax, and the positive economic impact that the 1031 exchange program provides, repealing the code would not result in any significant additional tax revenue to the U.S. Treasury. Exchanges are revenue neutral over the long-term because gain deferred is directly offset by a reduction in future depreciation deductions for assets purchased through the exchange program. The bottom line is that the government would not accomplish the desired outcome by abolishing the 1031 exchange tax law. Abolishing the code would have the opposite effect.
How You Can Help Preserve the 1031 Exchange Tax Law
Congress needs to hear from as many people as possible to help them understand that repealing the 1031 exchange rules would be a colossal mistake. Reach out to your congressional representatives and senators to explain the importance of the 1031 tax code within your business and urge them to preserve the existing laws. Please visit 1031taxreform.com to send a letter to Congress.