Why Restricting 1031 Exchanges Would Decrease Reinvestment in Minority Communities

For 100 years, 1031 exchanges have allowed investors to defer capital gains taxes from the sale of commercial real estate and reinvest that money into new properties. The strategic reinvestment in redeveloping underperforming properties generates numerous economic benefits including:

• Jobs

• Labor income

• Property taxes and Federal taxes (far in excess of the Federal taxes deferred)  

In recent years, the Black American community has increased its share of the commercial real estate investment market through the use of 1031 like-kind exchanges. This has allowed many to make critical reinvestments in their communities, while simultaneously building personal wealth.

The American Families Plan’s proposed cap on 1031 exchanges at $500,000 is shortsighted and counterproductive for many reasons. Restricting 1031 exchanges right now would severely diminish many taxpayers’ ability and willingness to reinvest in commercial real estate and redevelop properties.

Recovering from the Pandemic

COVID-19 has forced countless shopping malls, hotels, office buildings, and restaurants across the nation to close their doors. We will need substantial reinvestment from every available resource to redevelop commercial spaces if our national, regional and local economies are to regain strength.

1031 exchanges encourage that needed reinvestment.

Nationally, 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 middle-class Black Americans, 1031 exchanges have presented new opportunities to:

• Plan for a comfortable retirement

• Create intergenerational wealth

• Grow business interests organically without overreliance on debt

• Reinvest in their communities

A cap on 1031 exchanges would remove those opportunities and reinstall daunting barriers to the commercial real estate marketplace at a time our economy needs every willing investor.  

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Why 1031 Exchanges Should be Preserved

As part of a multi-part infrastructure spending plan, President Biden has proposed capping Section 1031 like-kind exchanges by disallowing taxpayers from utilizing 1031 exchanges if their gains exceed $500,000.

Repealing the 1031 exchange provision would harm real estate investors of all sizes by forcing them to forego new investments or go into debt to finance their transactions. On top of that, it would also fail to raise significant revenue.

What are 1031 Exchanges?

1031 exchanges allow taxpayers to defer taxes on their capital gains if they reinvest those earnings in a new replacement property. Section 1031 has existed in the tax code for 100 years. Because investors don’t have to pay tax until they cash out, Section 1031 eliminates a potential barrier to investment, which promotes a more efficient allocation of capital resources.

1031 Exchanges are NOT a Tax Loophole

Critics of 1031 exchanges falsely claim that they are a loophole that allows taxpayers to avoid paying taxes. This is not true. The 1031 exchange provision defers rather than eliminates tax liability. A taxpayer that utilizes Section 1031 will eventually have to pay taxes on the asset when they cash out.

This tax deferral period is often shorter than many assume because taxpayers do not utilize 1031 exchanges indefinitely.

How do 1031 Exchanges Benefit the Economy?

There are significant benefits to the tax deferral offered by 1031 exchanges. Recent studies have found that 1031 exchanges provide taxpayers with liquidity that they can use to invest and create jobs. By providing additional liquidity, 1031 exchanges allow investors to avoid taking on debt and becoming over-leveraged. This also helps with the financing of new real estate projects, promoting a competitive and affordable housing market.

1031 exchanges are typically used for smaller real estate transactions. According to the National Association of Realtors, 1031 exchanges were used in roughly 12% of real estate sales. Almost 85% of these transactions were from smaller investors such as sole proprietorships or S corporations.

Repealing 1031 exchanges would increase holding periods as taxpayers would be encouraged to retain assets longer to avoid paying capital gains taxes.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

If Congress Repeals Section 1031, will Previous Exchanges Still Hold?

If section 1031 is repealed by Congress the question arises: “what about previous 1031 exchanges that were already completed? Will those still hold up even if the like-kind exchange is removed from the tax code?”

Date Certain

Congress typically sets a date certain when a tax change will be implemented and any 1031 exchanges you have been previously completed before that date certain will probably be just fine. The unfortunate situation will be for 1031 exchanges that are in the works and can't be completed before that effective date or change occurs. Those exchanges may not be able to be completed even though they are going through the motions.

Contact Your Reps

We don't know if Congress will eliminate the 1031 exchange. We hope that it doesn't. But if they do affect the change we’re hoping that all previously commenced 1031 exchanges will be respected, even if they're completed after the transition date.

Congress is currently working on tax reform. If you want to make sure that the 1031 exchange is preserved in this reform, contact your representatives and let them know where you stand.

• Start Your 1031 Exchange: If you have questions about 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Save the 1031 Exchange - Contact Your Representatives

The 1031 exchange has been around for almost 100 years. But it may be on the chopping block as President Trump and Congress look at potential tax reform. Many people have called me and they're concerned about saving section 1031 and they want to know what they can do to help. 

How Your Can Help

There's a grassroots movement brewing up among real estate Investors and entrepreneurs that have real estate with substantial potential gains and they're thinking “What am I going to do? What is my exit strategy if Congress arbitrarily just eliminates section 1031 as part of an overall tax reform?”

Contact Your Representatives

Click on this link to find your Congressional representatives and voice your concerns directly to the legislature that hold your future in their hands.

Let them know that you're concerned that if they eliminate this provision in the tax code that’s been around since 1921 it will adversely affect the economy, it will reduce economic growth, and real estate values will plummet. Let them know that you support a very surgical and thoughtful revision of the tax code that would save and preserve this very beneficial tax strategy.

• Start Your 1031 Exchange: If you have questions about section 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved