The 1031 exchange is an essential tool needed to rebuild the American economy after the damages done by the COVID-19 pandemic – and it is at serious risk as part of the American Families Plan being considered in Washington.
Every community in the nation, including those here in the Twin Cities, have witnessed the closing of countless malls, shopping centers, hotels, office buildings, and restaurants due to the fallout from the pandemic. In order to regain economic strength, we will need to substantially reinvest in and repurpose these properties. 1031 exchanges are a perfect tool for accomplishing just that!
1031 Exchange History
For the past 100 years, 1031 exchanges have been a cornerstone of the U.S. commercial real estate market. Like-kind exchanges generate economic benefits which far exceed the amount of taxes deferred. The American Families Plan proposes to cap the amount of gains that can be deferred via 1031 exchange at $500,000. This is a counterproductive cap that would result in economic stagnation, not recovery.
Contrary to a common misconception, a 1031 exchange is a deferral, not an elimination of tax. According to a study done by professors David C. Ling (Univ. of Fla.) and Milena Petrova (Syracuse Univ.), 80% of the taxpayers who conduct a 1031 exchange do only one exchange and then dispose of the property in a taxable sale. A restrictive cap on commercial real estate reinvestment would send an already struggling market into a tailspin.
1031 Exchanges Create Jobs
1031 exchanges are also a powerful job creation tool. Ernst & Young estimated that the reinvestment through 1031 exchanges for the coming year will create more than 560,000 new jobs paying more than $27.5 billion in labor income, generate $14 billion in federal, state and local taxes and add $55 billion to the GDP.
For many in the middle class, including many Black, Latino, and Asian realtors and investors, 1031 exchanges serve as their retirement strategy. Many of these groups are, for the first time, beginning to realize the hope of creating intergenerational wealth and a comfortable retirement by investing in real estate. They should not have to face the threat of a cap on using 1031 exchanges to attain these goals.