How important is the 1031 Exchange?  To investment real estate owners – extremely!  To the economy – very!  To the short-sighted Federal Government?  Insignificant.

The Federal Government is willing to kill an important provision in the IRS Code that creates jobs, keeps investment dollars working and actually builds our economy.  Congress has forgotten that investment capital in the U.S. is the “goose” that continues to lay the “golden egg” of prosperity. 

But when the U.S. National Debt is $18,304,260,000 (that’s 18 trillion as of 7:45 pm on 7/13/15, (see www.usdebtclock.org), Congress is desperate to get more money.  The Ernst and Young study, “The Economic Impact of Repealing Like-Kind Exchange Rules” estimates that if the 1031 is repealed, there will be an overall reduction of U.S. GDP by $61 to $131 billion over 10 years.

Currently, there are three different proposals the federal government is considering.  So, who is pushing for this? 

  • Former Sen. Max Baucus (D-Montana), who became U.S. ambassador to China earlier this year.  He released a draft proposal when he was chairman of the Senate Finance Committee that would potentially eliminate 1031 Exchanges.  His proposal is still before the Senate Finance Committee for discussion. 
  • U.S. Rep Dave Camp (Michigan), chairman of the House Ways and Means Committee, has released a proposed tax bill eliminating all Section 1031 Exchanges beginning January 1, 2015. 
  • U.S. Rep Paul Ryan (WI), the Chair of the House Ways and Mean Committee planned to pass a tax reform bill prior to the Congressional recess in August, based on Rep. Camp’s bill to eliminate the 1031 Exchange. 
  • Senator Orin Hatch (UT) is also working on a tax-reform bill. 
  • President Obama, in his 2015 budget proposal, wants to limit the amount of capital gains deferred in a 1031 exchange to $1 million (indexed for inflation) per taxpayer per taxable year, beginning January 1, 2015.

Why is This Important to You?

Why is this important to YOU, the investment real estate owner and to a growing, prosperous U.S. economy?

Section 1031 of the Internal Revenue Code (IRC), has a very long history dating back to 1921 (Federal Income Tax only became permanent in 1913).  In the 1954 Amendment to the Federal Tax Code, the law adopted the present day definition of the “tax-deferred like-kind exchange”, laying the framework for the current structure.

Through the years, there have been compelling reasons why Congress has kept this key provision in the Federal Tax Code (contrary to popular myth, Section 1031 is not a loophole or a tax savings vehicle, the capital gains tax is not avoided – it is merely deferred).  This is sound tax policy benefitting millions of American Investors and businesses every year keeping billions of dollars moving in the U.S. economy.

Here is the essential logic.  An investor or business owner, when exchanging an appreciated property for another like-kind property, does not realize the gain inherent in the relinquished property.  The investor has merely changed the form of his investment, keeping every dollar of equity and debt working in the economy.  The Code is only allowing the investor to seek a more suitable property.

Imagine the problems of owning real estate when one must relocate, does one chase across the country to manage their rental?  Also, one may seek to exchange acquiring a larger property for their business or to engage professional management or acquire a higher quality property with less headaches.

Mobility and flexibility are important as one creates equity through a better opportunity or a “value-add” play.  The overall economy benefits because every dollar stays at work for years in the private economy thereby employing people, expanding real estate, stabilizing values and generating predictable tax dollars, both income tax from rents and property taxes.

The 1031 Code needs to be protected; it is the goose that lays the golden eggs through perpetuity.  But, because of the immediate need for more money, politicians have forgotten this.

Section 1031 provides investment continuity in which no profit is realized only while the capital is fully deployed, thus there is no premise for taxation. 1031 exchanges contribute a powerful value to the U.S. Economy and to millions of investment and business owners of real estate like ourselves.

Please go to www.1031taxreform.com and bring your influence to the discussion in Washington D.C.  Contact your U.S. Representatives and Senators via phone, email or the link above. 

Roger W. Bowlin is President of Real Estate Transition Solutions.  Reprinted with permission of UPDATE, the Rental Housing Industry News Journal.