[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.]
"While many Americans may not have directly participated in a 1031 tax-deferred exchange, certainly many Americans have been impacted by the economic activity and job creation created by these transactions. Dr. Milena Petrova and Dr. David Ling, of Syracuse University and the University of Florida respectively, recently published a study analyzing data on more than 1.6 million real estate transactions over 18 years. The study found Section 1031 to be key in stabilizing rents, safeguarding property values, and strengthening the economy. They concluded that 1031 Exchanges result in the following:
- Increased job creation: When real estate is acquired in a 1031 Exchange, the property tends to benefit more upgrades, remodeling improvements, and other capital expenditures than real estate acquired without a 1031 Exchange. This creates jobs for contractors, appraisers, electricians, plumbers, roofers, landscapers, and others.
- The generation of substantial tax revenue: Though investors do use 1031 Exchanges to defer tax payments, it’s important to realize that 34 percent of the time, some federal tax is paid in the year of the exchange. Moreover, state and local tax revenue increases in the years following transactions as valuations increase and result in higher tax liabilities. Additionally, substantial revenue comes out of transfer taxes, which are paid as a part of every transaction regardless of whether it's done as a 1031 Exchange.
- Debt reduction: Property acquired in a 1031 Exchange that is similar or equal to the price of the relinquished asset carries approximately 10 percent less debt than property acquired outside of a 1031 Exchange.
- Increased real estate sales activity: Like-kind exchanges increase liquidity of the market because they motivate sellers to act. In an analysis of 336,752 properties that were acquired and sold between 1997 and 2014, the researchers found that properties involved in like-kind exchanges had significantly shorter holding periods.
Ernst & Young recently completed a macroeconomic study showing the negative impact of eliminating 1031 Exchanges, also at the behest of the Like-Kind Exchange Coalition and other groups. Ernst & Young found that overturning Section 1031 would result in a hit of between $60 billion and $131 billion to the economy over ten years, in terms of the tax revenue and income that would be lost. Also, they predicted businesses would hold onto capital for significantly longer, resulting in a less efficient market. They also predicted investors and businesses would be less likely to make improvements to their assets, which would mean a huge loss of labor income, much of which would hurt lower-income earners. Lastly, investors might send their capital abroad, driving resources out of the United States, as the loss of the 1031 Exchange would make domestic opportunities less appealing."