ADISA supports retaining existing like-kind exchange provisions of real property permitted under Section 1031 of the tax code. 1031 LKEs create a ladder of economic opportunity for small and minority-owned businesses, generate tax revenue for states and localities, and promote conservation of land. Elimination of 1031 LKEs would have a detrimental economic impact on retail investors, jobs, and the real estate markets. 

1031 Like-Kind Exchanges are a fundamental element of the tax code. Since 1921, Section 1031 of the Internal Revenue Code has permitted the deferral of capital gains on the sale of real property when the funds are reinvested in similar property of equal or greater value (a like-kind exchange). Utilizing 1031s for 100 years, farmers, retirees, and investors continue to drive capital expenditures and job growth, while also contributing to land conservation efforts and facilitating the smooth functioning of real estate markets.

President Biden released his $1.8T American Families Plan on April 28^th. In it, the President proposed to end the special real estate tax break—that allows real estate investors to defer taxation when they exchange property—for gains greater than $500,000. 

Section 1031 of the Internal Revenue Code, created 100 years ago in 1921 and amended by the 2017 Tax Cuts and Jobs Act (TCJA), permits the seller of real property held for use in a trade or business or for investment to be replaced with a like kind real property of equal or greater value within 180 days of the sale (a like-kind exchange) and a deferral of capital gains tax until the replacement property is sold in a fully taxable sale.

Rules for 1031 LKEs are narrowly tailored.  Since their inception Congress has modified and improved the provision by eliminating potential abuses and creating strict and uniform rules and procedures for an exchange. In 2017 Congress narrowed the provision to eliminate LKEs for all assets other than real property. 1031 LKEs remain a deeply ingrained and beneficial aspect of commercial real estate markets and the overall economy.

Two in-depth studies by authors Ling & Petrova, The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate (2015) and The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate (2020) highlight the critical role 1031 LKEs play in safeguarding property values, increasing state and local tax receipts, and strengthening the economy. Other studies and analyses, including by EY, demonstrate the positive impact of 1031 LKEs.

1031 LKEs Help Small and Minority-Owned Businesses Expand and Grow. Veteran-owned, women-owned, and minority-owned businesses use 1031 LKEs to expand and build equity in their companies without having to rely on expensive and difficult-to-obtain bank or third-party lending. These owners lack access to the capital markets that finance large corporations. 1031 LKEs also help small and minority-owned businesses grow organically, with 30% less debt than similar real estate acquired outside of a 1031 LKE – an issue negatively impacting minorities. 

-        Despite significant benefits, some policymakers propose eliminating 1031 LKEs.

The result: taxes will increase. For a typical property owner who defers his or her gain on a commercial property, repealing 1031 LKEs would raise the effective tax rate on the taxpayer’s investment (including rental income and gain; nine-year holding period) from 23 percent to 30 percent.

The result: property values will drop.  A repeal of 1031 tax provisions would result in a decline of property values by 8-12 percent, just to maintain the same rate of return to retail investors. These price declines would reduce the wealth of a large cross-section of households and slow or stop construction in many local markets.

1031 LKEs Increase the Supply of Affordable Rental Housing. 1031 LKEs provide incentives for the development of affordable housing. Multifamily housing transactions represent 40% of 1031 LKEs.  Expanding workforce housing requires significant investment of private capital, but tax incentives like the low-income housing tax credit do not apply to land acquisition costs. 1031 LKEs fill that void: developers and investors can use 1031 LKEs to acquire land for the development of new housing.  The repeal of 1031 LKEs would increase costs, resulting in a significant increase in rents.

-        Despite significant benefits, some policymakers propose eliminating 1031 LKEs.

The result: Rents will increase. Rents would need to increase 8-13 percent before new construction would be economically viable. These higher rents would reduce the affordability of commercial space for both large and small tenants. The price declines and rent effects of eliminating real estate like-kind exchanges would be more pronounced in high-tax states.

1031 LKEs Drive Job Creation.  Research by EY estimates that 1031 LKEs support 568,000 jobs generating over $55billion of annual value added, including $27.5 billion of labor income.  Employment directly and indirectly supported by 1031 LKEs include jobs for skilled tradesmen, architects, designers, building material suppliers, movers, building maintenance and cleaning staff, security, landscapers, qualified intermediaries, real estate brokers, title insurers, settlement agents, attorneys, accountants, lenders, property inspectors, appraisers, surveyors, insurers, and contractors. 

-        Despite significant benefits, some policymakers propose eliminating 1031 LKEs.

The result: real estate sales activity will decline. 1031 LKEs increase the liquidity of the real estate market. An analysis of 336,572 properties that were acquired and sold between 1997 and 2014 showed that properties involved in 1031 LKEs had significantly shorter holding periods.

Farmers Rely on 1031 LKEs.  Farmers and ranchers use like-kind exchanges to combine acreage, acquire higher-grade land, or otherwise improve the quality of their operations.  Retiring farmers are able to exchange their most valuable asset, their farm or ranch, for other real estate without diminishing the value of their life savings.

1031 LKEs Promote Land Conservation and Environmental Protection. Land conservation organizations rely on 1031 LKEs to preserve open spaces for public use or environmental protection.  Land conservation transactions often involve the exchange of environmentally sensitive areas for other privately held property, such as adjacent farmland or ranchland. These transactions protect environmentally significant land and open space for the future while enabling private landowners to preserve capital for expansion or diversification of existing operations, retirement, or other needs.

States and Localities Depend on 1031 LKE Tax Revenue. 1031 LKEs generate much-needed tax revenue for States and localities. The more frequent turnover of real estate attributable to section 1031 generates property transfer and recording fees, as well as property reassessments that increase the tax base. Most importantly, because of lower debt and greater capital investment rates, the taxes paid on the subsequent sale of these properties are significantly greater.

-        Despite significant benefits, some policymakers propose eliminating 1031 LKEs.

The result: tax receipts will decline. In the absence of exchanges, investors would delay disposing of their properties or engage in alternative tax deferred disposition strategies, which would reduce the tax revenues collected.

Federal Tax Revenues Depend on 1031 LKEs.  Capital gain deferred in an exchange reduces the owner’s tax basis in the replacement property. This results in smaller depreciation deductions going forward. In 34% of LKEs some federal tax is paid in the year of the exchange. More importantly, over the long run, 1031 LKEs boost tax revenue because of the higher tax liability that arises in the years following the initial exchange.

The Alternative & Direct Investment Securities Association (ADISA) is the largest U.S. trade association in the alternative and direct investment industry. ADISA is a national trade association of professionals involved in primarily non-traded alternative investments. We provide educational and networking opportunities for our members, and we actively lobby for our members’ interests on Capitol Hill, and in meetings with lawmakers and regulatory agencies. Founded in Indianapolis, IN, in 2003, ADISA has grown to include 4,500 key decision-makers who represent more than 220,000 professionals, including sponsor members that have raised more than $200 billion in equity and serve more than 1 million investors.

For more information, please contact John Harrison, Executive Director: jharrison@adisa.org