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  1. 1031 Exchange Investing
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  3. The 1031 Exchange Is Just Good Tax Policy
Tax and Legislative Issues

The 1031 Exchange Is Just Good Tax Policy

March 03, 2017

It is true that the like-kind exchange has been a part of U.S. tax policy since the Revenue Act of 1921. However, it is far more relevant that the principle upon which it rests is recognized at the most fundamental levels of American jurisprudence (see “Legal Recognition of Tax Fairness” here). It may even be true that the like-kind exchange has survived so long precisely because it is good tax policy, but the frequent reference to its age has clouded recent discourse.

Here is a list of recent mentions of the 100-year tenure of IRC section 1031:

  1. Suzanne Baker with Investment Property Exchange Services wrote a fantastic article about the purposes behind the 1031 exchange in which she refers to its age in the subtitle and the opening sentence.
  2. Equity Advantage, on their “Help Save the 1031 Exchange” landing page (also a great piece), lists age as reason #1 out of 3 for why it supports 1031 exchanges.
  3. Legal 1031 Exchange Services, in “1031 Exchanges in Danger of Being Repealed”, mentions the age of the 1031 exchange twice in the first paragraph.
  4. David Fisher of ExchangeRight Real Estate, in “Tax reform is needed, but be careful where you cut”, has an entire subheading dedicated to this point.
  5. Kathy Fettke of Real Wealth Network doubles down on the old-age angle. She writes in “WARNING – 1031 Exchange on Obama’s Chopping Block” that “The concept of the 1031 began hundreds of years ago”.
  6. Grover Norquist of Americans for Tax Reform write in an insightful letter to Congress opposing the repeal of section 1031 “like-kind” exchanges, that this provision has been in the tax code for “more than 100 years”.
  7. Finally, is guilty. It’s page “About Tax Fairness” says “Business interest deductions and Section 1031 have been an important part of the tax code since 1913 and 1921”.

The list could continue, but the point has been made. For whatever reason, the durability of the like-kind exchange almost never escapes mention. Here is why this practice should stop: by introducing arguments for the 1031 with reference to the fact that the policy is 100 years old, an utterly moot discussion point is introduced. It sets up critics to attack the policy as “outdated”, “obsolete”, and “arcane”. The age of a policy, however, is irrelevant to whether or not it ought to be kept. The point of reform is to put everything on the table.

Those interested in the 1031 exchange should focus on whether it meets the criteria for good tax policy, and keep remarks as lean as possible.

  • Is the 1031 exchange fair? Yes.
  • Does it raise revenue in the long-run? Yes.
  • Does it stimulate the economy? Yes.

Anything not directly related to these points is a distraction in the context of policy analysis.

As a case in point, reference to the old age of the 1031 has played an unfortunate role in the discussion papers put out by the most important office of tax policy analysis, the Joint Committee on Taxation (JCT). The JCT scores legislation that impacts revenue, and is known for being respectably apolitical and objective in its analyses. Its document on the 2015 Budget Proposal, which is relied upon by the 2016 and 2017 proposals, discusses the restriction of the 1031 exchange. The very first thing it mentions is that “Some may argue that the … proposal to limit … section 1031 disrupts nearly 100 years of settled tax policy.” (emphasis added). Naturally, the document then considers arguments that “there is little tax policy justification for the present-law rule” (emphasis added).

Proponents of the 1031 exchange have significant and powerful arguments on their side that have nothing to do with age. Not one of the articles mentioned in the list above rests its case for keeping the 1031 exchange on the fact that it has lasted nearly a century. Each discusses specific ways in which the 1031 exchange is fair, beneficial for individuals, and stimulating to the economy as a whole.

Furthermore 1031 exchange advocates also have access to several independent economic analyses that indicate that a repeal of section 1031 would have a devastating effect on the American economy. It is a shame when critics, and policy analysts, doing their best to remain unbiased, fail to sufficiently engage with this material. Mentioning that the 1031 exchange is 100 years old only provides the perfect excuse not to.

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