Take Action- Help Protect 1031
Many of you may be aware the White House is proposing to cap 1031 at $500,000.00 of gain deferral. Over the decades, the Executive Branch has asked Congress for changes in a variety of tax policy areas. Sometimes Congress agrees and makes changes and sometimes not. It is important to remember that Congress makes or changes tax policy and not the White House. We are in a “one party” majority environment so it is important to speak up. In the past, 1031 has been favored by the majority of the Senate (including many Democrats) so I feel optimistic that the request to change 1031 will face resistance both in the House and Senate. However, it is important to let your Representatives know you do not want this proposal to go through.
Now is the time to act and it is so easy. To let your voice be heard send a letter to your members of Congress urging them to preserve Section 1031. Our industry has developed a simple to use web page. Just click this link- take action. All you need to do is type in your information at the bottom of the page and select the send button. A verification code will be sent to your email. Please type the code into box. The site automatically recognizes your Representatives based on your address. Also, you can customize your message if you prefer.
If you want more resources, I suggest you explore the www.1031taxreform.com website. It has a vast amount of information including the summaries (and full versions) of two economic studies that show how impactful 1031 is to the US economy.
Here are several key findings and condensed talking points/facts:
The proposal to effectively eliminate Section 1031 like-kind exchanges, as a way to pay for President Biden’s proposed American Families Plan, will cause dramatic negative consequences for those in both commercial real estate and agriculture.
Section 1031 is an important tool used by business owners of all sizes, farmers, and ranchers to transition into locations that more efficiently meet their needs, instead of being tax-locked into yesterday’s inefficiencies. The American Families Plan’s proposed cap on like-kind exchanges at $500,000 will hurt commercial real estate and agriculture because the overwhelming majority of these transactions exceed the $500,000 limit.
The COVID-19 pandemic has imposed unexpected, unprecedented trauma on commercial property – particularly retail, hotel, and office space. A significant percentage of this property throughout the country may need to be repurposed. Larger investors are critical to revitalizing and renovating commercial real estate in a post-pandemic economy.
In agriculture, farmers and ranchers use like-kind exchanges to acquire acres closer to their operations, consolidate holdings and obtain higher quality land without diminishing cash flow. Section 1031 has also played a significant role in facilitating conservation and environmental effort by allowing owners to exchange environmentally sensitive acres for higher quality, less sensitive tracts. The permanent conservation easements resulting from these transactions allow for important restoration projects, such as watershed improvements, to occur.
Recent economic impact studies concluded that like-kind exchanges are a powerful stimulant of transactional activity that will create 568,000 jobs, including $27.5 billion of labor income and a total of $55.3 billion of value added to the U.S. economy. Industry studies have estimated that elimination of Section 1031 would depress the commercial and farm real estate economies by shrinking investment and slowing transactions.
Most importantly, under Section 1031, taxes are deferred, not eliminated. Studies show that the overwhelming majority of properties acquired through an exchange are later sold in a taxable transaction, at which time the tax is paid. Repealing Section 1031 would generate a relatively small amount of revenue, with the lost economic benefits far outweighing its cost to the treasury.
Please preserve Section 1031 in full as Congress considers the American Families Plan.
And from our trade organization-
The Federation of Exchange Accommodators (FEA) issued the following comment in response to President Biden’s American Families Plan, which proposes capping Section 1031 like-kind exchanges at $500,000:
“We oppose the Administration’s proposal to limit IRC Section 1031 like-kind exchange deferral to a maximum of $500,000 of gain, as a means to pay for the American Families Plan. We view this proposal, which would effectively eliminate commercial real estate exchanges, as well as larger farm and ranch exchanges, as a misguided view of the actual purpose and benefits of like-kind exchanges.
“Section 1031 encourages real estate transactional activity, and in doing so, is a powerful stimulator of the U.S. economy. Section 1031 is not an unfair or abusive loophole. It is broadly used by taxpayers ranging from middle class individuals exchanging rental houses and small apartment buildings, farmers, and small to mid-sized businesses, to larger taxpayers exchanging large commercial properties in major metropolitan areas.
“Smaller exchanges create a stable inventory of decent, affordable housing for working families. Section 1031 encourages turnover and investment of fresh capital in these properties, improving neighborhoods and providing decent places to live. Studies have shown that 1031 buyers invest significantly more capital in replacement properties than do non-1031 buyers.
Higher valued commercial real estate exchanges are an important source of jobs for contractors, skilled and unskilled blue-collar workers, lenders, real estate brokers, Qualified Intermediaries, title insurers, escrow companies, surveyors, appraisers, architects, landscapers, building material suppliers and more. The income earned generates tax revenue and consumer spending, furthering the economic impact.
Recent research by EY has estimated that like-kind exchanges are expected to generate 568,000 jobs this year, including $27.5 billion of labor income and a total of $55.3 billion of value added to the US economy. The economic impact of like-kind exchanges in their present form is a far better “pay-for” than eliminating this powerful stimulus.
Again, I encourage you to take action. I know from personal experience that this type of communication does have an impact on Congressional Representatives and their staff.