Asset Preservation, Inc. (API) opposes President Biden’s proposal to limit IRC Section 1031 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 many farm and ranch exchanges, as a misguided view of the actual purpose and benefits of 1031 exchanges.
Section 1031 tax-deferred exchanges encourage real estate transactional activity, and in doing so, are a powerful stimulator of the U.S. economy. Section 1031 is not an unfair or abusive loophole. It is used by a broad range of taxpayers: from middle-class individuals exchanging rental houses and small apartment buildings, farmers, ranchers, small to mid-sized businesses, as well as larger taxpayers exchanging commercial properties in major metropolitan areas.
Smaller exchanges create a stable inventory of decent, affordable housing for working families. 1031 exchanges encourage turnover and the investment of fresh capital in replacement properties, improving neighborhoods and providing good places to live. Studies have shown that 1031 exchange buyers invest significantly more capital in replacement properties than do non-1031 exchange 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 by these workers generates tax revenue and consumer spending, furthering a positive economic impact nationwide.
Recent research by EY has estimated that 1031 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 1031 exchanges in their present form is a far better “pay-for” than eliminating this powerful economic stimulus.