1031 Exchange in the Crosshairs of Tax Reform

[Editor's note: 1031Gateway supports the efforts of groups like www.SaveThe1031.org, which is exposing the devastation this tax reform proposal would unleash on our economy and mobilizing Americans to make their opposition known to Congress in order to stop this bill. Please visit www.SaveThe1031.org and fill out their form to directly send individual letters to your representative and senators in Congress, urging them to fight for the 1031 exchange.]

How do 1031 Exchanges benefit the investor and the economy? 

"Exchanges have been on the books as a part of the Internal Revenue Code in one form or another since 1921. The two primary purposes of the tax law were: 1) to avoid unfair taxation of ongoing investments in property, and 2) to encourage active reinvestment. These purposes are even more relevant today in our global economy than they were in 1921. Section 1031 not only permits efficient use of capital to preserve and manage cash flow, it also encourages U.S. businesses to reinvest in their domestic operations, rather than offshoring business activity."

"...1031 exchanges do stimulate more tax revenue while keeping the real estate market flowing. For example, if you sell an industrial building for $3M and exchange it for an office property that is $4M, two tax increases occur: 1) you will pay higher property taxes at the local level, and 2) hopefully the new property generates more cash flow than the previous property, which means you end up paying more ordinary income tax. Exchanges are win-win for the investor and the government. The investor gets to preserve their wealth by not immediately paying federal capital gains tax, state ordinary income tax, depreciation recapture and potentially a Healthcare surtax, while the government captures higher property taxes and more income tax."

What if 1031 Exchanges are eliminated as a part of the tax reform process? 

"Farmers, ranchers and investors (commercial and residential) who own and develop land will not be able to expense their land purchases, nor will they be able to exchange their land, buildings and equipment in the same way they can today.  Retaining Section 1031 is critical because the provision facilitates deal flow and helps eliminate a “lock-in” effect that would otherwise occur without 1031 Exchanges.  Section 1031 also encourages capital formation, increases development and property improvements, and stimulates economic activity. But if we aren’t proactive with these issues Congress may eliminate Section 1031."

Stephen Decker, on Link by Lee

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