I want to continue my discussion on the 1031 Like Kind Exchange and how this 100-year-old tax code is at-risk of being eliminated or capped by the Biden administration. We feel the proposed changes would have a tremendous negative impact on our local economy and we believe in supporting efforts to keep it in place.
The 1031 Like Kind Exchange option in our tax code as currently written, allows real estate owners to exchange their property for other income-producing properties and defer capital gains tax. At first glance, this tax code puts real estate investors at an unfair advantage compared to the buying or selling of any other businesses by non-investors. The fact is there are tax provisions (even advantages) in place to protect business acquisitions outside of real estate depending on how the business is structured (LLCs, Partnerships, etc.) Therefore, it is false to assume that there is preferential treatment toward investors through the tax code.
In addition, the owner of the real estate eventually liquidates the investment thus paying the full amount of taxes. According to a Ling & Petrova Study reviewing 1.6 million 1031 transactions, 80% of the exchangers did one 1031 and then sold their property in a taxable event in a 15-year window on average.
Each of these transactions result in transfer tax, recording fees, etc. of which a significant portion ends up in the local municipality tax coffers. In many cases, investors sell less expensive properties for larger more expensive properties. Increases in property values due to investment in upgrading and value-add renovating which often occurs when a property is purchased, ends back up in the local tax coffers through increased property taxes as well.
A study from Ernst & Young estimates the 1031 Like Kind Exchange program drives $4.4B in investments and related consumer spending, and firms participating in or supplying like-kind deals support 568,000 American jobs and $27.5B in wages and benefits. All told, E&Y estimates the existing 1031 exchange rules generate $55.3B in economic impact.
As economic casualties of the pandemic become more visible with many shopping malls, strip centers and restaurants closing and a struggling hotel and office building market – we need to ensure this economic driver remains intact.
The NACC has scheduled meetings with our local congressional delegation to discuss the importance of keeping the 1031 Like Kind tax code as currently written. Please reach out to me if you have questions, want more information and/or find out how you can help advocate for this vital tax code to support our thriving community.
*Crain’s Chicago Business, 6/8/21, by David Doig and Daniel Wagner
