There has been much discussion in Washington, D.C. in the last several months around “closing corporate loopholes” by removing or capping the hundred-year-old 1031 Like Kind Exchange option in our tax code.
This tax deferment option allows real estate owners to exchange their property for other income-producing properties and defer the tax on any unrealized gain. However, the owner of the real estate eventually liquidates the investment thus paying the full amount of taxes. Framing the real estate tax deferment as a corporate loophole impacting only the wealthy suggests a lack of understanding on how this tax deferment functions and how 1031 Like Kind Exchange use supports economic growth.
The availability of the 1031 is a major player and economic driver in any community – Naperville being no exception. The exciting real developments on East Ogden, the site of the second Costco, and the redevelopment of the 75th street/Naperville Blvd. shopping area were made possible through a series of 1031 Like Kind Exchanges. These commercial developments are having a “halo effect” as evidenced by the additional restaurants and retail establishments surrounding the site of the initial real estate development. To that point, an Ernst and Young (E&Y) study suggested that 1031 exchanges generate $4.4 billion in additional investment and 568,000 jobs each year. Source: (Chicago Agent Magazine, April 28, 2021) Thus, investment in distressed properties in underserved communities can truly be a lifeline for job growth, housing and commerce for the community.
It is important also to note that not all real estate exchanges employing the 1031 are made by major corporations. Many are smaller and mid-size investors who own only one or two properties, and they rely on this mechanism to make real estate transactions feasible.
The Naperville Area Chamber of Commerce Board of Directors recently voted on taking a position for the 1031 Like Kind Exchange to remain as currently written in the tax codes and to oppose the recently proposed $500,000 cap on the threshold for the sale to be considered a taxable event.
Changing the tax code to cap or remove the 1031 Like Kind Exchange option would be short sighted. Collecting the additional taxes with each real estate transaction (which are now deferred under the current 1031 tax code) will be an initial gain to the federal tax coffers. However, an exponential loss will occur in the missed additional taxes gained from real estate improvements, jobs creation, etc.
Closing Corporate loopholes sounds compelling to some; however, we must look at the actual data to determine the end win and not react to the face value of preventing tax advantages to the wealthy. It would impact small and midsize businesses and stymie economic growth, negatively impacting all wage earners.
Please reach out if you have questions or need more information on why the 1031 Like Kind Exchange needs to be preserved to keep our economy growing and our communities vibrant.
Here are some links with more data on the value of the 1031 Like Kind Exchange
The 1031 Like-Kind Exchange is a Key Tool for Investing in Diverse and Inclusive Communities
The 401(k) of Real Estate: The 1031 Like-Kind Exchange