New Research Highlights Economic Contributions of Like-Kind Exchanges

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As Section 1031 faces threats from Biden Administration, research found like-kind exchanges generate $7.8 billion in federal, state and local taxes this year.

“It’s a myth that Section 1031 is a loophole for the wealthy to avoid paying taxes,” said Julie Baird, FEA President.

New economic research estimates Section 1031 like-kind exchanges will contribute 568,000 jobs and $27.5 billion in labor income to the national economy and $55.3 billion to the U.S. gross domestic product in 2021, according to the Federation of Exchange Accommodators (FEA).

The research, conducted by Ernst and Young, also found that like-kind exchanges will generate approximately $7.8 billion in federal, state and local taxes this year. In addition, foregone depreciation, or reduced deductions, on the replacement properties, is estimated to bring in another $6 billion per year in income tax revenue.

Baird said all of this economic activity would grind to a halt if President Biden’s proposal to cap the 100-year-old tax deferral becomes law. As a means to pay for his $1.8 trillion American Families Plan, the President has proposed capping gain deferred under like-kind exchanges at $500,000.

“A cap on like-kind exchanges would effectively eliminate Section 1031 and cripple the commercial real estate market,” said Baird. “Many large commercial properties such as hotels, office buildings and retail spaces need to be reimagined or renovated as a result of the pandemic. These exchanges generate jobs for people such as contractors, construction workers, building material suppliers and many more. Without Section 1031, people will simply hold onto their properties instead of repurposing them.”

Approximately 10 to 20 percent of all commercial real estate transactions are 1031 exchanges, according to a November 2020 study by Professors Dr. David Ling and Milena Petrova. The Ling and Petrova study also found that 1031 buyers invest more capital into replacement properties than non-1031 buyers.

“It’s a myth that Section 1031 is a loophole for the wealthy to avoid paying taxes,” said Baird. “Section 1031 is used by a broad variety of taxpayers and the overwhelming majority of those who utilize like-kind exchanges eventually sell the replacement property in a taxable sale.”

According to the Ling and Petrova research, 80 percent of properties acquired through an exchange are later sold in a taxable transaction, at which time the tax is paid. The remaining 20 percent includes all non-taxable transfers such as foreclosure, eminent domain, partition or other court ordered transfer, divorce, partnership dissolution, gift and death.

2021 marks the 100th year anniversary of Section 1031 like-kind exchanges. “For 100 years, Section 1031 has been a powerful stimulator of the U.S. economy,” said Baird. “Capping like-kind exchanges takes away an important tool for revitalizing commercial real estate, and without it our communities and the U.S. economy will suffer.”

Copies of the full Ernst and Young study and the Ling and Petrova study can be found on http://www.1031taxreform.com.

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About the FEA: The Federation of Exchange Accommodators (“FEA)” is the only national trade association organized to represent professionals who facilitate like-kind exchanges under Internal Revenue Code Section 1031. Members of FEA include qualified intermediaries, their primary tax and legal counsel, as well as affiliated industries, like Delaware Statutory Trust (“DST”) sponsors, banks, real estate brokers, title companies, and settlement/escrow agents. FEA members range from small, privately held businesses to publicly traded title insurance companies and banks throughout small towns and big cities across the nation.

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Lynn Harkin

Julie Baird, Esq.
First American Exchange Company
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