Tax code

The value of exchange tax code type 1031, part 2

I want to continue my discussion about the 1031 Like Kind Exchange and how this century-old tax code risks being eliminated or capped by the Biden administration. We believe that the proposed changes would have a huge negative impact on our local economy and we believe in supporting efforts to keep it in place.

The 1031 Like Kind Exchange option in our tax code as currently drafted allows real estate owners to swap their property for other income generating properties and to defer capital gains tax. On the face of it, this tax code gives real estate investors an unfair advantage over the buying or selling of any other business by non-investors. The point is that there are tax provisions (or even benefits) to protect business acquisitions outside of real estate depending on how the business is structured (LLC, partnerships, etc.) Therefore, it is wrong to assume that there is preferential treatment towards investors by the tax code.

In addition, the owner of the building ends up liquidating the investment thereby paying the full amount of taxes. According to a Ling & Petrova study looking at 1.6 million 1031 transactions, 80% of exchangers made a 1031 and then sold their property in a taxable event within an average 15-year window.

Each of these operations gives rise to transfer rights, registration rights, etc. a significant portion of which is found in the local municipal tax coffers. In many cases, investors are selling cheaper properties for larger, more expensive properties. Increases in property values ​​due to investments in modernization and value-added renovations, which often occur when buying a property, also ends up in local tax coffers through the increase. property taxes.

An Ernst & Young study estimates that the 1031 Like Kind Exchange program generates $ 4.4 billion in investment and related consumer spending, and companies participating in or providing similar agreements support 568,000 U.S. jobs and $ 27.5 billion in salaries and benefits. In total, E&Y estimates that the existing 1,031 trading rules generate $ 55.3 billion in economic impact.

As the economic victims of the pandemic become more visible with the closure of many shopping malls, malls and restaurants and a struggling hotel and office building market – we must ensure that this economic engine remains intact.

The NACC has scheduled meetings with our local Congressional delegation to discuss the importance of keeping the 1031 Like Kind tax code as currently drafted. Please don’t hesitate to contact me if you have any questions, would like more information and / or find out how you can help defend this essential tax code to support our thriving community.

* Crain’s Chicago Business, 6/8/21, by David Doig and Daniel Wagner